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

Ladies and gentlemen, thank you for standing by. I am Maureen Hontinosis, your operator today. Welcome, and thank you for joining the AT&S conference call on the results for the first 9 months 2021, '22. [Operator Instructions] I would now like to turn the conference over to Mr. Philipp Gebhardt.

Thank you, Maureen. Good morning, ladies and gentlemen. Welcome to the AT&S 9 Months 2021-2022 Conference Call. With us today are Andreas Gerstenmayer, CEO; and Peter Schneider, CSO. Silvo Leitner and Karim Beglari, the heads of the Finance and Controlling Department are also on the line. Mr. Gerstenmayer will start with a brief overview of the key developments of the first 9 months, followed by a market update from Mr. Schneider. Afterwards, Andreas Gerstenmayer will comment on our 9-month figures, our current year guidance as well as the midterm guidance. As Maureen mentioned, the presentation will be followed by a Q&A session. Now I would like to hand over to Mr. Gerstenmayer, the floor is yours.

Thank you very much, Mr. Gebhardt, and also a warm welcome and good morning from my side for the Q3 earnings call of the AT&S. At the beginning, I will run you through the most key developments of the first 3 quarters. As you most likely have seen from our announcements already, we have a very good development, at least in the last quarter, in the third quarter, but in accumulated numbers, it's also a very nice track record for the running fiscal year. So the highlight is definitely that we have achieved significant increase in our EBITDA compared to last year of 30%, which is in line with our revenue growth. We have achieved adjusted EBITDA growth of 37%. And the good message is that all the business segments are somehow contributing to the company development. In absolute numbers, EBITDA grew from EUR 157 million last year to EUR 244 million this year. What we have also seen and what were one of the challenges is some impact from FX relation and translation. We had some increase in transport and energy costs. And I know everyone is always asking us about material cost impact and supply chain impact, which was to a certain extent, visible. And also, we had some impacting and influencing factors there. But on the other hand side, we are also able to transfer some of these effects to our customers via the pricing. In line with our technology strategy and becoming and staying ahead in the technology position, we again increased our R&D activities and spend. To keep the technology leadership in our markets, we rose the spending from EUR 58 million to EUR 83 million. We had a very nice transaction in terms of financing the growth. Just after the years change, we had the issues of this hybrid bond, which generated EUR 350 million, which is now also strengthening our equity position and gives us a good starting point for the next investment activities we will do in the calendar year '22 and '23. The CapEx expansion with the projects in Chongqing III, in Kulim and Austria mainly is fully on track. We see everything is meeting the schedules, everything is meeting our expectations. In the given environment, we have a very busy environment in electronics industry. We have all the equipment we need aligned with our suppliers and done reservations for capacities on the supplier side as well. We have started massively recruiting activities to hire enough and early enough people. We have prepared for all the trainings. We need more than 6,000 people in the coming quarters in Kulim. We need more than 700 people in Austria and we need additional 3,000 people in China to fully ramp Chongqing III. So far, from our operational performance, we have not seen significant impact from the chip shortage situation. On the other hand side, we see it in the -- especially in the automotive business. The dynamics are limited. So if you would be in a normal environment, our growth would -- could have been expected to come to higher levels. And as Mr. Gebhardt already said before, we will touch it later, but we were also able, again, to increase our full year guidance in terms of revenues. So the new guidance will be to grow by 28% to 30% for the running fiscal year, which again shows that all our ambitions, all our strategic projects are fully on track and our ambition to grow in the dimension, like we mentioned it in the midterm guidance is also fully on track. So this is the first rough overview. Mr. Schneider, will you now guide you through the latest market developments and also some of -- give you an overview about some of our projects. And as you know, I'm still the acting CFO. I will guide you later on through the numbers and give you the full year guidance. Thank you very much, Mr. Schneider. It's yours.

Good morning, everyone. Very much looking forward to give you an overview, a short overview of the market dynamics that we currently see in the markets and observe. And one topic for sure that is the key driver and will remain the key driver for our future growth is the topic of data and how it impacts the microelectronics industry, whether it's 5G, big data topics, artificial intelligence or Internet of Things, all these topics lead to a significant increase of the data volume that is being transferred and also needs to be stored. This data volume within 5 years will triple. And this is something that we see as a direct impact to our growth. If you would calculate that in 512 gigabyte memory flash drives. Currently, the data volume is somewhere above 100 billion, such flash drives equivalent, and this would go to 350 billion. So really a big growth that we see in the data volumes. What does this mean for us? This has an impact on all our activities, in particular on the substrates that are directly connected to the semiconductor market and also, in our case, particularly linked to the development of the server market and not only of the server market, but even more of the high-end applications for the server market. And if you compare the overall growth rates, the lower bar is the semiconductor and where you also have some low-end applications. So if you take the overall semiconductor market, the consensus is that next year, actually, there is no growth expected in 2023, whereas the substrate market will grow with quite a good growth rate. The high-end substrate, ABF substrate market for server ICs, however, will see a very, very dynamic growth. There are multiple reasons. One is the overall growth of the server market and another one is the technology change, heterogeneous integration, in particular, so the customers need to put more chips, need to put chiplets on one substrates, the substrates are getting bigger, and that needs more capacity and means also more value for the market. How does it look like for our key activities for the automotive. We do see, of course, the chip shortage, but the impact to AT&S is limited. Overall, we take advantage of the general trend to more electronic content in the vehicles. And to give you a comparison in automotive, in the first half year, we reported a market growth of 22%. We now see 23%, so more or less in line. For the Industrial segment, there is a strong economic tailwind and very -- for the Industrial segment, which typically grows with general economic growth, a very dynamic growth. Infrastructure investments are part of reason. Here, we see a further increase of the growth compared to the first half year from 19% to 22%. For Medical, stable growth rates, high-margin applications, as you know. Our aim is here to diversify further applications. We have seen in the last years, particularly in hearing aids, continued double-digit growth. We still see that first half year, 10% growth, still some impact from COVID, which disadvantaged this area compared to other areas, now 40% back to the growth rates that we saw in the history and very good double-digit growth. Consumer, computer, communications, we now move to the business unit mobile and substrates. Here, also an increased dynamic of growth we reported in the first half year, we saw a market growth of 18%, 18% and 13.5%. We now see 22%, 22%, 17% for consumer, computer and communication. Our diversification is on track, particularly in regards to PCBs for modules. So we more and more go into that direction, which is higher end, more possibility for differentiation compared to the main boards, particularly in the mobile phones. As far as substrates and semicon is concerned, 43%, very, very high growth rate. First half year, we saw 25%. So there is a dynamic, an increase in dynamic. Some parts this year, if we look at the overall market for sure, also due to pricing, if we observe what our competitors reported, our strategy is to partner up with customers. This partnering has been expanded significantly, as you know, over the last 12 months, and was the base for investing into Kulim. And we are -- we continue to strengthen the partnerships with our customers and also are working on the further diversification of the customer base. All in all, for your reference, you know this chart from the past. So this gives you the possibility to adjust your models. Overall, we see 6% growth rates over the next 5 years. And this shows how much AT&S outperforms the market in its areas. We see a very strong position and see also very good possibilities to increase our market share. Critical for us is also many, many topics, of course, but one major topic is to scale up the substrate production and substrate investments. And you know also this chart from the past, how Chongqing I, Chongqing III and Kulim activities, which are all substrate -- pure substrate factories, how these factories relate to each other in capacity. If you take this number and you look at it from a different angle, Chongqing III is about 1.5 the size of Chongqing I. Chongqing I is now fully in HVM, fully implemented. Chongqing III, we are rather at the beginning of the ramp and we'll finish Chongqing III in the year '23, '24. It will be fully ramped then. So then you could expect out of Chongqing III 1.5x the capacity we have today from Chongqing I. And Kulim will give by the year of '25; '26, not yet the full capacity, but in, let's say, in the time line of our guidance, guidance goes until' 25, '26, Kulim will reach round about the size of the full Chongqing III. Today, the first employees on the ground. And we still expect high volume production for Kulim by the fiscal year -- or by calendar year 2024. And to give you a flavor of where we are today, a very recent picture, I think it's from this week -- yes, from this week. And you would see the highs. This is these towers there. This is the piling ongoing. And you do not see towers, the piling in the front of the picture because their piling is already finished. So the pilots have already moved on to the next buildings. Overall, you see around about 6, 7 buildings that are getting erected more or less at the same time -- factories, administration building, infrastructure buildings. And in total, 60% of the piling, the data is currently that 60% of the piling has been done to give you just here an idea, that means we have driven into the earth 9,000 times. We had groundbreaking in November. We are completely in schedule. Of course, it's very early in the project. We have a long way to go, but the start is absolutely in time line and in line with our expectations. So I hope I was able to show you an update on what is very important for us, also towards our customers and as well as to you that what we promised, we also deliver. AT&S sees itself and is seen by also independent market researchers as one of the top players in HDI printed circuit boards. We see ourselves as the #2 in the high-end PCBs. And we have established ourselves there -- established ourselves in that area for several years already. We continue to work on the transformation to an interconnection solutions provider. Our base, our history is from level 0, the high-quality printed circuit boards, the PCBs for sure, focusing on the high end. The level 2 -- or the level 1 is progressing. We're successful -- we have successfully entered in the last 2 years with increasing dynamics in this fiscal year into the module PCB. So PCBs 4 modules, particularly in the mobile phone area. And we do develop here also substrates for modules. And we do continue with our preparations to provide the complete model solutions of complete models to the market with our R&D activities and other activities that we do in AT&S. We are preparing the ground for this level 2. Even so, we have the substrate situation. We have the substrate environment, which is extremely positive, where we do have a certain focus and we keep level 2 in our minds and there are teams which are especially working in that [indiscernible]. Our high-volume production for Chongqing III started early as originally expected in end of Q2 '21-'22. So we continued with pull-ins in this factory, and you saw that in the pull-ins of our guidances. And consequently, we increased our guidance to 28% to 30% growth and that's certainly above the expected market growth of 23%. Our aim is to become 1 of the top 3 players of the ABF substrate market. We are today #5. With all our market intelligence and observation, we see that we are on track. And consequently, we have announced that we'll reach the EUR 3.5 billion sales in '25, '26. And we completely keep our guidance as Mr. Gerstenmayer already pointed out in this introduction. Thank you very much.

Okay. So with that, we will turn back to the numbers and the performance of the company. So what Mr. Schneider has said, just I think we can underpin with the revenue number. Just remembering back the full year's revenue of last year, we already surpassed. So we have still 1 quarter to go, and we have already achieved -- overachieved last year's revenue levels. Despite we had some negative FX effects of EUR 18 million in this number of EUR 1.147 billion. EBITDA margin is pretty much in line with the growth. One could ask why isn't it growing. I think the good message is in a significant growth phase where we are still under ramp situation in the factories. We've built new capacities. We have to ramp and we have already people on site and we can keep the pace with a significant volume growth by keeping the margins on the same level. I think this is a good message, nothing wrong with it. If you talk about the adjusted EBITDA, adjusted means taking out the ramp activities and the ramp costs, we would see a 22.9% margin. Just comparing to previous year EBITDA margin, not adjusted last year, was 21.1. Adjusted was 21.7. Also here, you see a very nice track record and everything is heading into the right direction. So moving on to another picture in absolute numbers. Revenue, I already talked about. EBITDA now is also increased by 30% compared to last year in absolute numbers. If we would compare here, again, the adjusted numbers, it would be Q3 last year, EUR 192 million versus EUR 262 million this year. In adjusted number, it would be an increase of 37%. Net profit also increased nicely. And just keep in mind, I cannot repeat myself often enough, we are still under ramp conditions. So as Mr. Schneider said and I said it also in the beginning, Chongqing III has still a lot of potential but still a lot of activities to prepare for the full utilization of the plant, means we have around about 30% over of the equipment on site and operational. So 65% to 70% still needs to be implemented, still 3,000 people to be hired for everything needs to become operational. Everything needs to be improved in terms of efficiency and everything. So there's a lot of potential in front of us and still we can keep our nice profitability levels. And in terms of net profit, we can even increase. So I think a very nice development in absolute numbers especially. We have provided a kind of EBITDA bridge last time already. We can go through that briefly. You see we have -- starting from the EBITDA absolute numbers last year, EUR 167 million -- EUR 187 million, small numbers on my side, sorry. EUR 187 million, we need to deduct this EUR 30 million impact on the FX side. We need to deduct the additional EUR 24 million in R&D, and we need to deduct additional SG&A increase. We all need to remember we are preparing a company to scale up from 1-point-something billion to a company of 3-point-something. So if we would enter into the quota view, we will stay on a stable level in terms of SG&A. But in absolute numbers, we definitely need to add additional people to scale the company and to prepare ourselves for this huge growth position. We have the start-up costs of EUR 13 million. All this we need to deduct from the last year's numbers. Then we have some other effects. We have a very nice development in terms of sales mix, volume and some pricing, additional EUR 132 million. This shows the growth that is impacting the profit in the business. And finally, we end up with this EUR 244 million. So I think also that number shows on the one hand side, we are proactively preparing the company for the growth. On the other hand side, we can generate already very nice effects out of the operational business to keep our track record. Moving on to the quarterly development. Here, also, you can see another quarter of record. In terms of revenue, we achieved now a quarterly revenue of almost EUR 450 million, all-time high for the company and as I have described before, additional potential record quarters to be expected, probably not in the low season Q4 and Q1 of the fiscal year, but definitely once everything is again fully loaded in the high season, the growth perspective is there and we can confirm. Main drivers for the business, we have mainly for sure our ABF substrate business and also almost everything in terms of investment. CapEx is allocated to that. So naturally, that generates a huge jump. And it's responsible for the growth as a main driver. Despite we have certain FX effect also in the margins, we could also improve the margins on quarterly comparison. If you just compare Q3 last year, 22% or 23% in adjusted numbers, 25% nonadjusted, 27% adjusted this year, a significant improvement and again shows that we are able to compensate for the ramp and the ramp effort we need to bring in. Moving on to the development of our business segments. First, starting with Mobile Devices & Substrates. Again, here, you can see clearly the heavy impact of the ABF substrates actually or currently mainly generated out of Chongqing. So again, here, you can see a very nice growth in revenue but also a significant improvement of the margin. Underlying, still, we have a strong demand for the PCB for modules, as Mr. Schneider mentioned before. This is really nicely developing. If we would compare third quarter last year to this year, it's a growth of 3x in terms of volumes generated out of the module business. And also the EBITDA margin is also on a very healthy level. Coming to Automotive, Industrial, Medical segment, I need to explain 2 things. First of all, to highlight this in revenue, again, a nice growth versus last year of 24%. So what we always expected and communicated recovery after the COVID impact is there and we are back on track. Still keeping in mind that the automotive could show more dynamics, but they have some limitations, we all know. But also the margins with 10% is not a drop versus Q2. We all have -- we have communicated last time already this, in this 15% last time contained, there were significant provisions, especially from the European IPCEI scheme. This is a onetime effect. Otherwise, we should -- we would have a nice linear development improving from the 8% in the first quarter, somewhere around 8% to 9% in Q2 and now 10% in Q3. So also there, everything is on track and shows good development. Regarding our financial position, also there, a very healthy situation, and we need to explain or highlight there is the hybrid bond with this EUR 350 million not contained yet because the issue was after years changed, we were talking until end of December. The cash and cash equivalents, we have available is increasing EUR 644 million, mainly driven out of our solid profitability. We have generated -- we have a lot of unused credit lines decreased slightly by using them for the investment we are doing constantly. But in total, compared to the half year's numbers, the entire cash and liquidity situation has improved further to a level of EUR 962 million available facilities. Coming to the balance sheet, a few topics to highlight here. Clearly, we see a significant increase in total assets, driven by the heavy investment activities by 26%, but also a significant increase of the equity position. This has 2 main impacting factors. On the one hand side, it's driven by the positive development on the net income position, but also significant impact of FX out of translation and transaction effects in the other operating results. Yes. And equity ratio could not keep pace with the increase on the asset position, so it declined slightly from 34% to 32%. And as I said, it's mainly the effect that asset's position has grown faster than the equity increase, but both not a real problem for us. I think it's still a good development. And net debt also increased, but increased to a minor degree and we can foresee for the future a drop out of that due to the receiving prepayments and financing support from our customers. Cash flow also shows nice situation. We need to mention here that the cash flow from operating activities contains also already today, and in future to a more degree, the upfront payments of our customers. This is just following the -- we can call it recommendation or requirements from FMA that we cannot anymore declare the prepayments to be counted on equity. We now need to handle it as customer liabilities, and therefore, it's contained in the operating -- cash flow from operating activities from now on. We have higher CapEx for sure in the cash flow from investing activities, a little bit lower repayments from time deposits, but this is more fluctuating. Finally, the driver is the CapEx here. And this ends up with a negative operating free cash flow. I think no surprise also here in the heavy investment situation we are in, but still not that bad picture also from the operating free cash flow. You see the number of net CapEx for the first 3 quarters at the end of the table of EUR 436 million. And you know from our full year guidance, this will now be pushed up to almost around EUR 700 million until end of the fiscal year. This brings me already to the year-end guidance. As mentioned, it's just repeating myself. The growth is now to be expected on a level of 28% to 30%. I think it's the third time in this year that we can do an update and can increase our revenue guidance. You can also ask us, are we too conservative in that regard. I don't think so. We could not predict that positive development in our market environment. And also on the other hand side, there's a lot of activities in the background that we are able to operate to perform this output. There's a lot of gains in performance together with our customers, with our partners, with our suppliers, and you cannot anticipate always that everything is running into the right direction and a lot of activities have paid out. Profitability stays the same. We have a slight adjustment in the start-up activities. We reduced it from previous EUR 50 million to approximately EUR 25 million to EUR 35 million. It's more a time shift between fiscal years. As always, in our investment activities, we try to pay out anything, what we're doing either CapEx or operational cost, whatever to the latest possible moment. And also there, we can optimize our position and our spending. On the CapEx, for sure, as I said before, we will come at least close or a little bit above the EUR 700 million somewhere around there. Midterm guidance does not really change. I can repeat and confirm the midterm guidance we have provided. So revenue of EUR 3.5 billion, average growth at 24% annual. So you see we have already overachieved it this year. So looking forward, we have now a good track record, and we should also be able to show that the confidence in us could be there that we will be able to proceed in a similar positive way. Profitability, also 27% to 32%. As I said before, again, we have still some opportunities to improve. We still have the ramp situation today. On the adjusted numbers, we're already there. So once Chongqing III is fully up and ramped and also Kulim starts contributing, I think that is a realistic scenario, what we are showing there. Also, when we come to the end of this investment peak and also generating more cash flow out of the running operations on our ramping operations, the ROCE of more than 12% is a realistic scenario what we assume. Net EBITDA, we assume to stay below 3. What we can see already in -- at the end of Q3, we have decreased the net debt EBITDA number from 3 at half year to 2.2 at the 3 quarters view and main impacting factor there is, on the one hand side, profitability. But on the other hand side is the treatment of the customer prepayments, which is not contained in the debt position anymore as it is customer liabilities. Yes. And finally, equity ratio should stay on above 30% level. The only uncertainty I would say here is the FX. You have seen that equity is heavily impacted by FX contribution. So this is, for us, the question mark, but from the operational business, we have good signs that our target above 30% is realistic. So this concludes my report for the Q3, and we would now hand over to the moderator to open up for the Q&A session.

Yes. Thank you, Mr. Gerstenmayer. Thank you, Mr. Schneider. [Operator Instructions] Now I would like to hand over to Maureen to handle the session.

[Operator Instructions] Our first question is from Daniel Lion from Erste.

Congratulations for the strong performance. I would like, of course, to get some background information. Definitely, it may be difficult to answer. But when we look at Chongqing III, can you provide us with at least the share of capacity you've already ramped compared to the full capacity? So where do we stand now? And you also mentioned that the ramp is now faster. Does this relate to the new schedule with the full ramp being online in 3Q '23, '24? And one additional one, actually, we are seeing that profitability is increasing in the Mobile Devices & Substrates segments. Would you expect that profitability is going to increase gradually hand in hand with the increased capacities? Or will there be, at some point, also diluting impact on profitability in the course of the ramp. This would be my first one, if you want so.

Maybe for clarification. So I -- in my comment, I related -- this is Peter Schneider speaking. I related the prudence to our previous guidance. So it was not meant to be an adjustment of our forward-looking guidance. We still keep our guidance. I just wanted to give you a flavor of our confidence on reaching our time line. So in a nutshell, we are very confident that we will keep our time lines. And this is probably quite typical for the involvement of such a project. So we are in the area of, let's say, 1/4 or so of Chongqing III, which is now there to produce. Of course, see also some ramp and it's very difficult to say an exact figure because as we are in the ramp, these changes from week to week, and this is also not a straight line. So there are some ups and downs, but the principle, that's the chart that we have shown, gives you a good understanding of the ramp. And if you look at this in a more linear way because these factories have lines and we put in one line after the other. It is a good -- get a good indication if you have a linear development. As far as the margins are concerned, please relate yourself to the guidance that we have given. You see in the midterm guidance an increase of the margin versus today. So this already reflects that we see some increased margins. And as far as the diversification, we mentioned diversification a successful one into PCs or mobile here. It is very important for us also to sustain good margins, whereas we see in the phone business, main board business, rather a trend towards the commercialization. We, as AT&S, we diversify into areas where there is a specialization possible and where we can build up positions, which are rather unique with less competition and therefore, that gives us the possibility to keep margins high in that segment. You would add on?

No.

Okay. And my second question would relate to the client co-financing. Is it not fair to assume that the position the contract liabilities, the increase just because of the co-financing, so plus EUR 100 million? Would you -- could you give us some kind of guidance how to model in the ongoing payments from your customers on the one hand? And the second thing would relate then to redeeming these payments at a certain point in time, starting 2026, as you mentioned that these payments are actually set up like we have bond. So could you give us some kind of guidance how to model the repayment schedules going forward? Because this will definitely be crucial as well in terms of cash flow development.

I can understand that question. The problem is that we have a contractual framework that is not allowing us to enter into such kind of details. So what I can state here is we will receive over time, it's related to certain milestones, the prepayments. The prepayments will be treated as customer liabilities, so this will increase and improve our liquidity position. It will also help us to somehow improve the debt position because it's not treated as debt. It's clearly, if it's liability, it's not debt. It's not in the financial result. That helps a lot there. But on the other hand side, we also communicated that for Kulim, and please keep in mind, Kulim is not the only location we are investing and we have customers. In Kulim, we will receive around about 50% of the total investments as a prepayment from our customers. The rest for your modeling, I would ask you to refer to our guidance we will give in terms of revenues, profitability and so on. I cannot dig into the details how the full techniques regarding receiving and repaying and refunding the prepayments. This, I cannot disclose.

Our next question is from Mr. Patrick Steiner from Kepler Cheuvreux.