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

Ladies and gentlemen, thank you for standing by. I'm Mandy, your operator today. Welcome, and thank you for joining the AT&S conference call on current business environment. [Operator Instructions] I would now like to turn the conference over to Ms. Gerda Königstorfer.

Thank you, Mandy, and welcome to the AT&S Half Year 2020/'21 Conference Call. Today, we will give you an update on the market development on the first half year development of AT&S and the financials. And additional, we will also do an update on the IT substrate investments in the next months and next year. And finally, we will give you an update on the outlook for the full year 2020/'21. It's a pleasure to welcome today also the new Board members of this AT&S, the new CFO, Simone Faath; and the COO, Ingolf Schroeder. With that, I want to hand over to Andreas Gerstenmayer. He will go through the presentation. Thank you.

Okay. Thank you, Ms. Königstorfer, and also a warm welcome from my side to our first half year's conference call. Let's start with the new members of the Board. So I can clearly state that I'm happy that we have now completed our group Board again. You have been asking me always over the couple -- last couple of quarters how long it will take us. And finally, I think we were very much on time. We promised we will have a solution, hopefully until end of the calendar year. And with November now, Ms. Faath joined as the new CFO, and you already have seen Mr. Schroeder has joined the company already in September time frame. I wanted to give both of the colleagues a brief opportunity to introduce themselves. And if you have any further questions to them besides the figures, but probably the more important parties to the new Board members, then we can enter into that when we do the Q&A session at the end of the presentation. So let's start with Simone Faath to give a brief introduction of her.

Thank you, Andreas. So first of all, good morning to everybody. My name is Simone Faath. I'm the new CFO for AT&S. And actually, today is my second day with the company. So most recently, I worked for Hillrom for 5 years as Vice President, Finance for the Surgical Solutions Division. And prior to that, I held several commercial management positions within SAP, Thermo Fisher and Sachtler. I studied Economic Science at the University of Heidelberg and have a degree at [indiscernible]. And my responsibilities within AT&S are controlling finance, investor relations, legal, compliance and internal audit. And yes, and I'm now looking forward to working with my colleagues on executing our More than AT&S strategy and contributing to our profitable growth in the future. Thanks for listening.

Okay. Thank you very much, Ms Faath. Mr. Schroeder?

Okay. So then I would like to introduce myself as well. My name is Ingolf Schroeder. I'm with the AT&S since September 1, so 2 months for now. I worked before -- 24 years with Osram in various, mostly operational-related positions over the last 10 to 12 years, mainly with focusing on the automotive arena, both semiconductor-related and also traditional light sources. In addition, I took over, at the beginning of this calendar year, the COO role of one of the largest business units, the Automotive business units. And then I moved into the AT&S side. I studied in Berlin at the Technical University, Material Science. I have a Master degrees in there. My responsibilities here in the AT&S is the global operation, of course, the quality, the global supply chain management and the overall EHS responsibility. I will focus on a so-called data-driven leadership model, with a clear-based fundament of an operational excellence system. And hopefully, with that, I can also contribute to further growth and the excellence in the future. Thank you very much.

Okay. Thank you very much, Mr. Schroeder. Again, welcome to the AT&S Board, and happy to have you here. Yes, after that, and as you have seen with Ms. Faath, she has already done her introduction, and she has also got her start-up in AT&S. We have 1 day starting up and then we start doing our business again. We now enter into our report about the first half year. As always, I will talk a little bit about the global market development and also what are the highlights of AT&S at the beginning. So turning to Slide 3, market environment. I think we are all aware, we are still in global crisis environment. And we are facing significant ongoing volatility, especially driven by the COVID environment, but also with the trade frictions. We have the big day of elections in the U.S. today. We'll see what will be the outcome there. And quite some other things are going on. Unfortunately, we had also this incident in Vienna yesterday. Yes. Nevertheless, AT&S somehow is in a position that we are, most likely, in a market that can be benefiting from the actual situation. We all see more digitalization. We all see virtualization of work. And also, we see that the working environment of the people is changing significantly, and has already changed. COVID has driven this development significantly. Some of the experts say it has pushed out the global society by 10 years towards digitalization. And what we definitely see is significantly rising data traffic, huge amount of data that needs to be processed or transferred and so on. So everything -- what we are doing today is somehow related to digital equipment, digitalized environment, but also finally, microelectronic applications. So IoT, big data, high-end processor models that are the enablers of the digitalization. Still, we see the trade frictions, and we are quite sure that, also, whatever the outcome in U.S. will be, this will not completely go away. I think this will somehow remain. Probably, the style will change, but let's see what will be the outcome. From the current -- last quarter, we have seen that, especially in the mobile device area, the 5G technology has entered the marketplace, has entered the devices. But on the other hand side, it gave us also a bit better visibility in the market, because market took up the new technologies. And especially in Asia, people are eager to get these new devices. Automotive market, we have been talking about that over the last couple of quarters. It was a very, yes, volatile business, low visibility. What we have experienced in the second quarter is that some kind of bottoming out. So what we see, most likely, the worst downturn is over, and we see a slight improvement again. So our expectation from today's point of view is improvement will continue. But as already said several times, it will take quite some time until we will achieve precrisis levels again. Industrial investment stays on a lower level, quite a while already. It started in 2019. But it -- the good message there, it's not getting worse. So we have a stable situation, flattening out on moderate levels. Market in medical devices has shown some impact in the first quarter. We all know the medical systems have been heavily burdened by the COVID treatment and by reserving capacities. But the market came back, especially in the therapy area, in the implant applications. And so we have seen already a nice recovery in the second quarter. Turning to Slide 4. What is the situation in AT&S? Some key highlights. Still, our IT substrate business is running on very high demand levels, but also the ramp of our new capacities in Chongqing I are on time and have happened on time. So we promised it, we delivered it, and now we can see the results of it already. Customer application, diversification in the smartphone area, we have also reported we have been able to diversify our portfolio of customers in the mobile device area. This is also now helping us to level out some of the fluctuations in demand and also some of the delays we have seen in certain projects, moving the peak season from quarter 2 to quarter 3. Yes, for sure, in the Automotive segment, we cannot completely escape the market development. But again, we can see a sequential improvement in the second quarter. Industrial, we are running on flat level, slight improvement versus 2019 already seen. So also there, we have been able to slightly grow, mainly driven by better product mix. And Medical & Healthcare, as I said before, in Q2, we have seen demand coming back, mainly by restarting the medical environment in the second quarter. Moving to Slide 5, in numbers. Here, you can see in the half year's numbers, we have achieved a revenue of almost EUR 538 million. The negative FX effect in the revenue stream is about EUR 5 million. We have generated a very nice EBITDA level of EUR 111 million. Here, we see a positive impact of almost EUR 3 million out of FX translation effects. We have also shown that our net debt has been increasing. We come to that a little bit later. We have EBIT of EUR 32.8 million generated despite -- we have been facing higher depreciation out of our CapEx programs. This is a significant improvement versus last year's numbers. And we have generated an operating free cash flow of minus EUR 112 million, mainly driven by the high investment activities. So the EBITDA margin came in on the same level like we had it last year on 20.7%. And in total, I consider this result for the first half year a great success of the company, knowing we are in a situation of one of the largest crisis since World War II. And AT&S is growing in revenue and in EBITDA by 10% in absolute figures, so I think we can consider this as a great success of the entire AT&S team and showing that our strategy is paying out and providing us the opportunity, even in crisis environment, that we somehow can show a robust business development. Coming to Slide 6, revenue distribution by segment. For sure, the growth in the Mobile Devices & Substrates area is going on now on a level of 75% of our entire revenues. And the Automotive, Industrial, Medical coming on 25%. We all know major investments in the CapEx and capacities and technologies over the last couple of years has been allocated in Mobile Devices & Substrates. And in addition, now we have seen a little bit of a downturn in the Automotive, Industrial and Medical, which is mainly the drivers for the development here. Revenue split by region. Again, here, we show the revenue distribution by our end customers, not by shipped to parties. Here, you again see 72% is allocated to U.S.-based customers; 12% is the European home market, Germany/Austria; 10% is Asia; and Europe is -- rest of Europe is 6%. Moving to the segment reports on Slide 7. We can talk about the Mobile Device & Substrates business. And here, again, you can see now the significant impact of the recovery in the Mobile Device business, but also the impact of the additional capacities we have created in Chongqing I, a second phase for IC substrates. And here, you can see that revenue has improved significantly. The same is true for EBITDA and EBITDA margin. EBITDA margin came in, in half year, with a level of 22.8%. Moving on to Automotive, Industrial, Medical, 2 messages here. On a year-by-year or year-over-year comparison, you see that we have a decline in revenue stream, we have declining margin, and we have declining EBITDA. But on the second quarter, you can see that we have already achieved significant improvements in that period. We have been coming closer to the last year's figures of the second quarter in terms of revenue and in terms of EBITDA margin. We are close. So you see the recovery is taking place, and we are quite confident that this will be an ongoing development, if not very significant impact from one of these crisis areas will hit our business in the coming periods. The entire situation of the business, the development confirms for us that we are on the right way. And this is also the reason why we clearly decided that we will continue with our investment projects. So our expectation on Slide 9 is that the entire CapEx allocation for 2020/'21 will come up -- could come up to a level of, in total, EUR 520 million. This is composed of up to EUR 80 million for maintenance and technology upgrades for the existing plants. This is EUR 410 million for the new strategic projects, mainly Chongqing I phase 2 and Chongqing III. And we have this timing variance of EUR 30 million, which is just achieved over from last fiscal year to this fiscal year, just move from one period to the other. Coming to the balance sheet, the main key figures there. For sure, total assets in the light of the ongoing investments and CapEx spend has been increasing by 9%, coming in now on a EUR 2 billion level, mainly driven by the fixed asset additions. We have the equity situation slightly declining by 3.9%, and the same is true for the equity ratio, mainly driven by translation adjustments. We have a lot of foreign exchange impact and a lot of our assets are allocated to the -- at least dollar-related area in China and in Asia. And therefore, the volatility in the foreign exchange rate is impacting us significantly. And we have the net debt increase in the light of the CapEx program, mainly driven by additional loans and the additional promissory note loan we have been closing in the last couple of quarters. From a cash flow perspective, cash flow from operating activities improved by 34%, which is mainly driven by the better EBIT. We have seen a significantly higher cash flow from investing activities, which is mainly driven by the net CapEx and by financial assets increase. And we have the cash flow from financing activities. Again, as I said before, we have more proceeds from borrowings. We have some government grants and some -- and the dividends we've paid in the summer period. So in total, from cash flow, we have to observe that the CapEx program shows its impact. But as we can see from the history, finally, these CapEx programs will play out in terms of company growth, revenue growth, but also sooner or later, by seeing better profitability and better positioning of the company in the market. How do we finance all that? We consider our financing structure as a solid one. On Slide 12, you see the details. Note, there is no significant changes to last quarter. For sure, we have consumed some of our existing liquid funds. But still, our credit lines are on a level of EUR 425 million. And we have the cash reserve and financial assets of EUR 526 million, altogether, almost EUR 952 million of financing power. And together with our constant strong operational cash flow, we are quite confident that we can and will be able to solidly finance the investment we have initiated already. So this was it mainly from the numbers of the company. We turn over to the market outlook and the market situation, briefly some words about that because the change is not that significant. For sure, in 2020, we need to consider in some of the market areas that we have a temporary downturn, but our strategy is built on a mid-term perspective. And we -- in total, we can see that we are facing a quite positive market environment. On the midterm perspective, the entire market will most likely grow by over -- almost 4.7%. The major drivers in the market is, on the one hand side, the IC substrate business, with an expected growth rate of 11.4%, but also once automotive is coming back, the expectation is that the growth will be on a level of 4.5%. Also, the communication area, 5.5%, and all the others are more or less on a very nice positive level. So this provides very nice perspectives for the company and this underpins our investment focus in the IC substrate. On Slide 14, you can already see that we are progressing significantly with our investment in Chongqing III. The large building you see in the foreground, this is already the new building. It's the factory shell roof closing took place in October time frame already. So we are, again, completely on time. We had been facing this 8 -- 6- to 8-week delays all caused by the COVID. This is constantly decreasing, and we expect that we can progress in improving further the SOP of the factory. And once we are now installing the infrastructure and later on the equipment, one number -- some 80 days from today, first, production equipment will already be entering the factory. And I think this is, again, a very impressive development and the impressive proof of the capabilities for AT&S building up such kind of new capacities, technologies and factories in a row of, I would say, at least 20 years of investing in China. On the right -- on the Slide 15, you see the -- also the progress we have achieved. We have been talking about this slide over a couple of quarters already. Here, now you can see that, as we have been promising for this fiscal year, the Chongqing I expansion will come onstream. We have now more than 80% or 90% of the output capacity available already. There are some things we have to finalize that the 100% of this year's planned capacity additions will come onstream. And we are -- we can confirm that we announced 50% of this expansion will be -- will show impact for the entire fiscal year. So moving on. A little bit talking about more in detail about the ABF or IC substrates market. We have prepared this slide here to give you an overview what is the position of AT&S in the substrates area, especially ABF substrate, which means this is the high-end part of the market, addressing the high processing -- the high-power processing and high-performance processing units for data center service, edge computing, automotive applications. As you can see from today's perspective, AT&S is, in this market, on a #5 position. With all the investment we know from our competitors, but also our investment added up, we will be on a #3 position in 2025. And I think this is, again, impressive perspective. AT&S can show we are catching up. A few years ago, we have been a nobody in this business. We are already on 5, and we will go to number 3. We started production in 2016. So within 9 years, we will come in a very competitive market environment, very high technical requirement to a #3 position. I think this should give a good outlook, a good impression how we are performing in that market. And if you remember, back to the market's development, 11 -- more than 11% market growth, I think we have really allocated our investment in the right market environment and marketplace. On Slide 17, you can see, on the one hand side, what we have been talking about, how the volume and the unit growth in the high-end processor module market will be 8.1% until 2025 in average. And you can see already what are the major players on the customer side. Besides Intel, we have NVIDIA, AMD, Qualcomm, Broadcom and so on. So this is the portfolio we can address with that technology. And once we are adding new capacities to our portfolio, we will start to be -- enable ourselves also to enter into other customers' portfolio. What is the main driver behind the IC substrates market? On Slide 18, as I already said in the beginning, we are in the middle of the digital transformation of our society. We will see that a lot or we already see that a lot of connected devices, which is finally creating the Internet of Things environment, entering the market. The number of connected devices, which will enter the market, will grow by 4.6% in average over the next 5 years. So today, we have 42 billion devices out there in the market. 2025, 55 billion units out there, and its various applications. You have the handhelds, you have the e-commerce applications. You have augmented reality, which is considered to be a very heavy driver for data, data analytics and data transmissions. We have a lot of biometric authentication. We have other things entering the market like automotive -- autonomous driving and so on. So this is heavily driving the market. And the big trend is from, today, a very big focus in the cloud computing to future architectures, it's the edge computing or on-the-device computing. So this will enable the distributed devices to become more smarter, to become more powerful. And this is also what 5G is supporting, because we need more intelligence on the device level in the future. on Slide 19, you also can see what is then driving the data generation and the data transmission and analytics. For sure, once autonomous driving is entering the market fully on all levels, the data generated out of a car will be incredible. We have a lot of medical applications. We all know already that simulation data analytics has entered already the medical area. A lot of data are used there, and I think also that, in the future, will become more and more. And we have also other like climate research and vision processing, all these kind of things. And again, in the background, we have a lot of augmented -- a lot of artificial intelligence applications to support these heavy trends. So the data volume that will -- we will be facing and this we need to manage is a growth by almost 28% over the next 5 years. And again, the petabyte is a number with 12 zeroes behind the number, so almost incredible how big these volumes will be. And all this needs very complex, high-end processing modules. And the high-end processing models will have significant larger form factors. They will have more build-up layers. This substrate is also kind of a sandwich build-up. In Austria, it's always easy to explain. You know the [indiscernible]. So basically, you can compare substrates and PCBs with that one. You just need to replace the chocolate or the nut cream with the copper. And then you have almost a PCB, a little bit more structure on it, but good work. On the other hand side, we need a lot of very powerful processing components, which means also that the interconnect speed, the data transmission speed needs to be significantly improved. That is driving another trend, which is called heterogenous integration. So the processor packages will become more integrated. They will contain much more components in future. And these components, the CPU, the memory, the CPU, everything what will be contained in there needs to be connected via very high-speed connections. And this is, again, something what the IC substrates in the future needs to provide. And last but not least, power consumption. Everything, what is driven -- autonomous, what is driven, handless -- handhelds and wireless somehow needs a battery. And power consumption will be an important topic coming from the handhelds up to the electric-driven cars. Everything needs to be more power-efficient and the power consumptions need to come down. And we all know already high-end data processing is already consuming a lot of power, and that will become a hot topic in future as well. So then, we will come to the market outlook for IC substrates, in value, because it's a value-driven business. The market growth in value will be 11.4% over the next 5 years, as already communicated at the market overview. So this is the underlying story behind IC substrates. I hope we could make transparent even more why we are investing so much money in that kind of business. We have already invested quite significant money in Chongqing I factory. We are doing now the investment of EUR 1 billion in Chongqing III, pushing -- coming online as fast as possible to support the market windows, which are available out there. And this is the story behind, and I think we have decided quite well. Besides that, on Slide 21, we have also been talking about modularization of electronics. We are progressing. I already said last quarter that we expect already this year a revenue generation out of module components, module PCBs, module substrates of a double-digit million euro level. We have been able to talk about new module applications also over the recent days. We also have discussed -- announced that we will do an expansion of our Chongqing II factory, the subset-like PCB factory, which is perfect for entering into the module market, of EUR 160 million over the next 2 to 3 years. We have created already some long-term relationships with customers in that area. We have already entered into some high-frequency 5G modules, power modules and variable modules. And what you have seen from the latest press release, we have been able, with one Asian customer, LG, to develop a new WiFi module to enable that module to become the smallest WiFi module in the world. So you can see, our technology toolbox is meeting the market requirements, and we are also positioned quite well to enter into that one. And this is the second part of our More than AT&S strategy becoming a significant player in the module market as well, like we have been able in doing it in high-end PCB and also in IC substrates. So coming to the outlook for 2020/2021. The last quarters, we were not that sure that we can really talk about the full year's outlook. We have been doing a quarterly outlook for the first and second quarter. I clearly can state we have achieved all the older promises. We have also met what we have been committed, and we are also now able to give an outlook for the rest of the year. Our expectation, based on the existing environment, based on the development we have recognized over the first 2 quarters, we are quite confident that our revenue growth will be on a level of 15% as well, as we will need an EBITDA margin in the range of 20% to 22%, most likely. So based on this strong first half year, with the order situation we have for the quarter 3 visible and what we assume for the fourth quarter, we are confident that we will meet these numbers. I think, again, in a crisis environment, this is a great achievement. And this should also help us to show the market that we are online, that we are on -- yes, that we are progressing quite well in implementing our midterm guidance. Regarding investment program, this, we will continue, as said before. And we will push for implementing everything, what we have defined and decided on that. Regarding the midterm guidance, no change there. Midterm, we still target the EUR 2 billion revenue stream, which translates into 15% growth rate every year, or we can show we can achieve it already in the crisis environment. So confidence level is high that we will also be able, on the midterm, to meet the EUR 2 billion targets. And the same is true for the EBITDA midterm target, 25% to 30% should be in the area of reach. So this was it for this time. Thank you for listening. We have -- I hope we had been able to show a nice development for the first half year. And now we are available for your questions.

Thank you, Andreas Gerstenmayer, for your report about the first half year. Now I want to hand over to Mandy to introduce the Q&A session.

[Operator Instructions] And the first question comes from Joerg-Andre Finke from HSBC.

I have actually 2. The first one is on ABF and your comments with regard to the upcoming growth expectations. Just maybe you can remind us what kind of end market splits we have. I think there's quite a degree of automotive market exposure. And maybe you can comment on how the sort of change in the automotive end markets since you started sort of the expansion in 2016 is impacting the midterm outlook here. And the second... [Audio Gap]

I would like to start with a first question on the guidance. Could the -- with the full year guidance in place, could you help us break it down into the individual quarters? Obviously, third quarter will be a record-breaking quarter, of course, but what does this mean? The guidance, what does it imply for the fourth quarter, especially in a year-on-year comparison?

Yes. This has always been the situation once you open up in a while that you enter into quarterly guidance disclosure. What we can state is that the third quarter, for sure, will this year be the peak quarter. We already announced that last quarter that we have -- we will see the shift of the peak season in the mobile device area from quarter 2 to quarter 3. And when you visit our records of the last couple of years, you have see we can already observe a kind of fluctuation between quarter 2 and quarter 3 in terms of peak season. Yes, quarter 3 will be the highest one. We have quite good visibility about quarter 3. Quarter 4 is still based on certain assumptions. We need to see how the entire market environment will develop here. But I think we've tried to sign an NDA so...

Yes. Sorry, yes, home office.

And in the fourth quarter, I think I cannot call -- talk about the number today. It's based on certain assumptions. But I think the confidence level for the rest of the year, the guidance we have given is quite high.

Maybe as a follow-up to this. Is it fair to assume that to take last year's fourth quarter in active substrates? Or is this far too aggressive?

I think this would be too easy because we still are not on the same level in the other areas. So we need to be a bit more cautious there. And what I like to ask you to consider is that we have also certain -- we will see a certain seasonality in the mobile device area, as always. And this is very hard to predict. So there is a lot of potential impacting factors there. We still do not know how Chinese New Year will impact, how the entire situation in Europe will develop further. So I would not approach it like that.

Okay. Yes. Okay. Yes, I understand. And then maybe continuing with the IC substrates. You've mentioned that you have reached your 80% capacity expansion related to your expansion targets for this year, which would be 90% more capacity by year-end. So this would mean 70% of capacity is already added at the end of Q2? Would this be correct?

Yes. Yes. Yes. This is correct, yes.

Okay. Perfect. And then one topic we've discussed already in previous calls, but I would like to maybe still help me understand or help us understand a little bit better, the relationship of CapEx and revenues and profitability, especially regarding the third plant. The last time we talked about it, I said that's 500 -- EUR 1 billion in CapEx would translate into EUR 500 million in revenues, based on your midterm guidance. And I don't understand why this relationship really occurs. And how does this relate to the profitability that you still actually target way higher because of higher margin in -- of the new substrates? The way I would understand it is, of course, new technology, more complex technology would require higher costs. So would it -- is it really sufficient to have the economies of scale to bring up the profitability to the target level with the lower revenues? Or am I missing something here?

I think there's one detail missing. If you're really able to enter into new technologies, which provide more advantages for the entire application, the valuation of this solution could be higher, and therefore, also the profit could be higher. It's not -- most likely not a linear function of adding cost and price impact and profitability impact.

So then, in the end, it's just scale that helps?

For sure, the scale helps a lot, but also the new technology, which is somehow subsidizing other existing technologies and providing better profitability out of that because, for the customer, it's more cost efficient. And for us, it's, I think, more attractive to enter into that because the margins are better.

At the moment, there seem to be no further questions. So we have the next question from Teresa Schinwald, Raiffeisen CENTROBANK.

My first question focuses rather on the currency impact, which was probably very strong in the second quarter. Could you walk us through the effects here, in particular, when it comes to the U.S. dollar and the Chinese yuan?

So as said already, we see around about EUR 5 million on the level of -- minus EUR 5 million on the level of revenue. We see around about EUR 2.8 million positive on the EBITDA level. And we have seen on the equity, around about -- give me a second to check. Somehow -- one second, let me find the number, not to tell you something wrong. 31, mainly, on the equity level, minus.

And this was a combined effect or U.S. dollar only?