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

Ladies and gentlemen, thank you for standing by. I am Patricia Bison, 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 Mr. Philipp Gebhardt.

Thank you, Patricia. Good morning, ladies and gentlemen. Welcome to the AT&S Full Year 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 Departments are also on the line. Mr. Gerstenmayer will start with a brief overview of the key developments of the fiscal year followed by a market update from Mr. Schneider. Afterwards, Andreas Gerstenmayer will comment on substrate strategy, the financial figures, our full year guidance as well as the midterm guidance. As Patricia 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, Mr. Gebhardt. And also a warm welcome to our annual earnings call for the fiscal year 2021-2022. So as you most likely have seen from our today already disclosed numbers, we had really a very nice fiscal year 2021-2022, coming in with a record revenue of EUR 1.6 billion following our growth strategy we have been communicating and also following the investments we are executing. Also the EBITDA showed a very nice growth with 42% versus last year. And the adjusted EBITDA -- you know, we have this adjusted number against or eliminating the ramp-up cost for the large investment programs of 48% growth compared to last year. We had some negative impact on FX, especially on the bottom line. We had some transport and energy cost increases. I think this is not a surprise to anybody in the current environment. And we also followed our clear technology road map and strengthened our R&D activities to secure the technology leadership and also to introduce the latest level of technologies to our locations. All our capacity expansion projects are fully on track. We will cover that a little bit later in the presentation. And I think we are happy to also let our shareholders to participate on the success. And therefore, we will propose a EUR 0.90 dividend to the annual shareholder assembly. For the running fiscal year, our revenue guidance is on the level of EUR 2 billion, and we also will -- are expecting an increased profitability. The details I will share with you later. I will ask now Mr. Schneider to guide you through the market overview, and I will be back with the strategy and number part later.

Hello. Good morning and a quick overview on the market situation. We are experiencing quite dynamic presence. And as you can see, we are succeeding in nicely growing markets. And just to give you a brief overview, we are benefiting of high growth in basically all applications. And if you look at the server growth, this is, in reality, what we see is much higher than just the server growth because of the architecture of the chips that change and if you follow us, you know very well about that. We do have some COVID and post COVID growth after -- in the last fiscal year still. And what really happens is that our diversification pays off. This is the first year that we really take advantage of the diversification in the Mobile Devices area, where we have a quite important impact on our sales revenue in smart watches, wireless headphones and these kind of applications. The volatility is quite high at the moment with the economic environment and inflation. But if you look at the smartphones, just to give you a heads up on where we stand there, our focus is like for almost all -- I would say, all applications. Our focus is the high end. And therefore, if you observe the smartphone market, you really have to differentiate between the high end and low end development. We do see quite important growth. Also the growth prospects are still very solid. And therefore, we are quite confident that we are well positioned there. We benefit of increasing functionalities, and therefore, continue our growth story there. In our traditional industries -- in the traditional PCB markets of automotive, industry and medical, we achieved, in the last fiscal year, a growth in all areas. In the automotive, there's little impact on the -- of the chip shortage, growth could have been higher there. But nevertheless, we have seen also here quite nice developments. The most dynamic growth we saw in industrial electronics. These are markets where we benefit of automation in industries and infrastructure projects. And we also saw a rebound after the COVID times when investments into medical areas were diverted towards COVID-related topics we see a rebound there in the hearing aids, which for us is very important, as you can imagine, from a profitability point of view. As far as the future is concerned, the big topic continues to be the digitalization in all spheres of our life. And if you look at the data volumes and the predictions of data volumes, it's only almost a tripling of the data. Here, just to give you an example from -- on data part and again, all these areas that are important to stay for data generation, data volumes, driving our growth. What we see in the long term -- just to give you a little aspect of how this growth story will continue. We see our first concrete impact of the so-called metaverse that also creates additional data volumes, and it's just -- it's a long curve, but it's an exponential growth. And this is now really being seen in the market and starts to impact the data volumes. Therefore, the demand for high-end server chips and, as you know, in our IC substrates. This is our key focus market. So all in all, a very good environment in which AT&S currently works.

Okay. Thank you very much, Mr. Schneider, for your overview. So how will that materialize in our business in the future? And how we are moving on with the strategy implementation and also with our strategic projects? We call it our magic substrate triangle, what we are about to install. You all know we have already on stream our Chongqing I plant, Chongqing III is now coming step-by-step on stream as well. We are building up a facility in Kulim, which will come on stream in end year 2024. And we have the R&D center, which is under construction in Leoben and will drive further technology development. So this is our path for growth and success in the IC substrate business. It's worth to mention, for sure, we are also driving forward our PCB business. We are accelerating our technologies. And as it was already described before, we are progressing very nicely with the module substrate PCBs out of Chongqing II, which is also progressing quite nicely, but the big projects are allocated to the strong demand side of the IC substrates, and this is why we are focusing on this topic today in the presentation. Yes, Kulim is a very busy site. It's a huge plant -- location. It's 220,000 square meters. You can see it somewhere on this picture. In the front, you can see the progress of the first large building, which we call K1 production plant. It's nicely progressing. Foundations are done, and also the slabs and the concrete activities on the first level is progressing on track. You see all the area around is also busy. And in the background, behind the K1, there is already the next second plant underway. R&D center, Leoben, also nicely progressing. In this picture, it's just excavation, but we already progressed here nicely and also the slab is under construction already. So everything is on time. Everything is on schedule. And yes, for sure, we are fighting also with all the topics, other construction facilities or construction projects are challenged with. It's a certain cost increase. It's a certain labor shortage, a little bit more in Europe than in Malaysia, but so far, nothing really crucial on that, and we can -- we're happy to see that we are progressing nicely. Where we are in terms of capacity expansion? You know this slide from the past. We are now at the end of the fiscal year 2021-2022. You see we have already more than doubled the capacity to the starting phase after Chongqing I phase 1. And you see that the growth will be more or less exponential in the coming years until 2025-2026, 8 times -- more than 8.5x the capacity from the beginning. So this Chongqing III and Kulim will contribute to our growth. So everything is there on track, and we are planning to be on time with the capacities in the market. Just to give you some numbers here. In Chongqing, the second line is under ramp. The third and fourth line are under preparation. Equipment is starting to come in. We have hundreds, if not thousands, of containers of equipment already installed in Chongqing, more to come. In Kulim, as I said, construction is proceeding as planned. We have already 450 employees on board. So we are approaching 10% of the entire labor force. For sure, in the beginning, it's more the engineering part. It's all the experts we are training. We are training on-site either in Chongqing or in other locations, but we are also here completely on time to bring in the right labor force to support the ramp on time. Yes, I think this is about the strategy implementation. The most important project, as I said before. For sure, there are a lot of other projects in the background where we take care that we can manage the growth of the company. We are preparing the company in a structured process-wise, but also technology-wise, in all areas. And we are also confident that from the management point of view from the labor and staff point of view, we are nicely prepared or will prepare ourselves to be digest and benefit from the growth perspective and opportunities we have in front of us. From the numbers, as I said in the beginning already, revenue was quite nice with almost EUR 1.6 million (sic) [ billion ]. We have very slight FX effect in that, I think it's round about EUR 5 million-or-so. We came in with an EBITDA margin of 22%. The adjusted EBITDA margin is 23.8%. That means that we exclude around about EUR 29 million cost for materials and wages when we do the adjustments, so ending up in 230 basis points. But I think this is quite successful development and a little bit above our previous expectations, but the market is strong and also the performance, the factories are showing is strong as well. A little bit more in detail to compare against last year. Revenue growth by 34%, EBITDA growth by 42%, net profit growth by 117%. I think all shows into the right direction. And just keep in mind, we are not fully utilizing all our space and facilities. We are still under ramp, a significant ramp in Chongqing. Just to give you another flavor what is happening there beside the equipment, we're about to hire more than 3,000 people in the next quarters to come. So this could -- should also show you that there's a lot in front of us, but that provides the growth I have been showing before. Yes. Quarterly revenue development. We have the highest Q4 revenue in the AT&S history. The same is true for the EBITDA. For sure, that is mainly driven by the growth in the substrate business. And we have been talking about it in the past. Substrates is helping us to level out the seasonality we have seen in the Mobile Device and consumer market business more in the past. So we could expect a significant flattening of the seasonality. But for sure, we still have the situation that Chinese and U.S. happening in the last quarter and still our business with Mobile Devices and PCBs in the high-end communication area is impacting. So we cannot completely exclude it, but it's significantly improving the annual profile. From the business segment point of view, Mobile Device substrates, the main driver for sure is the capacity expansion in Chongqing, but we have still a very nice development in the PCB area. As I said before, the PCB for modules is growing nicely. And we just started that business 2 years ago and can already communicate that we achieved a 3-digit million revenue stream in this business segment. EBITDA is also on a very nice level, impacted in the first -- in the last quarter by the Chinese New Year effect, but from the operational point of view, everything is pointing into the right direction. Automotive, Industrial, Medical, also very nice development. We have a nice growth against last fiscal year in all the business segments. Also there, we have got, in the last quarter, a very, very high level of revenue. And the profitability was boosted by our IPCEI participation. We have been talking about with some of the technology projects in Austria, we are participating in the European. IPCEI means Important Project of Common European Interest, which is supporting technology implementation in Europe. And we are participating in the program for IPCEI Microelectronic 1. There is another program underway, Microelectronic 2. This is under heavy discussion where we also applied, and we are looking forward to get some grants from that program in future as well, especially for our R&D center in Leoben. Financial position. We've built up all the financial facilities to support our growth. We are now entering into the peak phase of the big investments. So this in the next year will be the peak in terms of CapEx. Chongqing III is heavily spending and more and more Kulim is coming on stream. So this will show effects, but you can also see our financing capabilities are nicely prepared. We have EUR 1.12 billion of cash and cash equivalents. This is a combination of debt, promissory note loans and the support of our customers. And we have still unused credit lines in the background if we need additional money on short notice, we can support the financing from there. Coming to the balance sheet. For sure, the assets are growing. We are investing heavily. We have also incorporated here the customer prepayments in the assets and our hybrid was also incorporated here. We have a nice development in the equity position which is growing nicely, mainly also driven by our nice profitability level and some other effects. The equity ratio stays almost the same. Here, we need to keep our eye on because it's also impacted by some FX translation and transaction effects. So equity ratio will be a topic we need to observe closely for the periods to come. We have always stated our target is to stay above 30% in a heavy investment phase next and the year after, potentially, we could temporarily fall below, but that also needs to be observed because we have not only operational impact there, we have FX impact there. And if the operations and the projects are running and proceeding above expectations, it will also support the development there. Net debt is on a very nice level. The net debt against EBITDA is 0.6. That is mainly impacted on the one hand side, for sure, by the performance of the company, but also heavily from the customer prepayments, which is incorporated in that number. Cash flow, probably a surprise that we have been able to generate a positive operating free cash flow. But also, again, this is impacted by the customer prepayments that will, over time, now be reversed. For sure, for the next 2, most likely 3 years, the free cash flow will turn negative again as we're entering the peak phase of the CapEx. The rest, I think, is very nicely developing. The cash flow for operating activities there is included this customer prepayments because it's customer liabilities for us. We have the investment activities mainly driven by our EUR 602 million net CapEx, a little bit balanced from some financing facilities, but mainly it's coming out of the net CapEx. Yes. Cash flow from financing activities out of our free cash loan and other facilities and operating free cash flow asset before on the level of 111 positive. Yes. This brings us to the dividend proposal. You see it's a kind of peak as well, but the decision was to let our shareholders contribute to the performance of the company. And also what we think is that the argument we are still in investing phase is getting weaker and weaker because we are investing now since more than 12 years in a row. So we heavily discussed that internally, and we are convinced that it's -- on the one hand side, we can manage it. We can cover it. And I think it's also an important sign for our loan -- that they can participate once the company and is able to let and benefit on the performance. So the dividend proposal, as I said before, is EUR 0.90 per share. We split it in a so-called basic dividend of EUR 0.78, which is double the dividend of last year and add it a special dividend of EUR 0.12 on top, so coming then to the EUR 0.9 dividend proposal. Looking forward, for the running -- already running fiscal year 2022-2023, the growth pace will go on. We will most likely come in on a level of around about EUR 2 billion. The adjusted EBITDA margin is expected to come in between 23% to 26%. The adjustment is on a level of around about EUR 75 million, covering mainly the big projects in Chongqing and Kulim. And the net CapEx we expect, and this is what I said before, one of the key tiers, EUR 1.25 billion, what we expect in spending for the big investment projects. Midterm guidance, we can keep it short. Thus, we keep the midterm guidance on the level like we have been communicating it. I think, is still a nice prospect. And as I said already in the previous meetings, we are focusing now on executing the large projects. All the resources are closely monitoring and handling all the activities to ensure that, again, we can deliver what we promised, like we did always in the past, and this is our big target for the periods to come. So this is what we wanted to talk about today. We wanted to show you today. Summarizing, I think the performance of the company is heading in the right direction. We're happy with what the team's achieved. You all should keep in mind we have still COVID in place. We have COVID in Europe, we have COVID in Asia. Despite that, we were able to ramp a complete facility during the pandemic situation, Chongqing III. We were able to select a new location, Kulim, during our scouting project and start building the largest site for AT&S. Everything is progressing according to the plans. And this shows that you can be confident that the experience is there that AT&S even in a challenging environment is able to deliver what the company is promising. Thank you for your attention, and we are now open for your questions.

Thank you, Mr. Gerstenmayer. Thank you, Mr. Schneider. We will now start the Q&A. [Operator Instructions] Now I would like to hand over to Patricia to handle the session.

[Operator Instructions] And the first question is coming from Patrick Steiner.

Patrick Steiner from Kepler Cheuvreux. Two questions from my side. First one would be, can you give us some more information on your view of supply and demand in the high-end ABF substrate industry going forward? We've seen competitors increasingly ramping up capacities as well? Has anything changed in your view substantially over the last couple of quarters?

Happy to start answering this. Thank you for the question. No, we did not see any substantial change. We continue to closely observe. There's an ongoing investment. We see the gap closing over the coming years. There are different estimates. How big the overcapacities are, I'm not too sure if this is a lot of value, frankly speaking. Whether it's 40% or 30% is still a shortage. The interesting question is when will it level out. We believe that in the lower end, it might take around about 2 years. In the higher end, 4, 5 years. And we are playing particularly in the higher end, where only very few suppliers are able to supply. Two Japanese, maybe a Taiwanese competitor are, at the moment, able to supply in that industry, and it looks like we are best positioned of all. So we are very confident that we will be able to fill our factories.

Okay. Very clear. Second question would be what kind of foreign exchange rate assumptions are included in your current 2022-'23 guidance?

Give me a second, it's 1.17.

For the U.S. dollar, right?

U.S. dollars, yes.

And we have the next question coming from Alexander Thiel.

I could find only 2 questions from my side. Firstly, could you briefly touch on your CapEx delay from this year to next year? What has been the driver to postpone the EUR 100 million? And my second question would be on your current impact from the lockdowns in Shanghai. Could you comment on your current trading and the situation you see on the ground?

Okay. Thank you for your questions. CapEx delay. I think this is not a surprise to us. The policy in the company always has been that we try to pay as late as possible. So first, we assume that everything is set in place. And the latest payment or the last payment of each of the equipment is done once the equipment shows really the final performance. This always has some leeway that we can delay a little bit payments. . And I think it's more managing aspect in the projects, but there's nothing you should be suspicious about having delays in the project. That is not the message we are sending with it. So the performance is there, the equipment is running, but there are still sometimes discussions about latest technology development, yield levels and then there's a lot of details behind, and we have specifications and contracts in place that give us the room that we have, the negotiations and pay as late as possible. Second question, Shanghai lockdown. Yes, the city is now in lockdown, I think, in the sixth week, our factory is continuously running, running on a quite nice level of, let's call it, an average 75-plus percent capacity. The team there is doing an incredible job they are able to bring the materials in, they are able to bring the products out to ship it to the customers, and the operations is running on a very -- for the environment sufficient level. So for us, it's okay. It's a very challenging environment. It's a very challenging situation. But if you compare ourselves to some of our competitors, they have experienced complete shutdowns for weeks like in Kunshan and other areas around Shanghai. So we are operating, we are running. And now we expect that the situation will improve. COVID cases are coming down. Yesterday, I think they were in the public area almost 0. And in the quarantine area, it was 700 or 800 something. So it's moving in the right direction until when the lockdown will be removed, we don't know. But if we can maintain our operations like it is today, yes, we should not be concerned about that.

Next question comes from Daniel Lion.

Can I start with 1 question on the guidance? Could you give us your assumptions for the upper end and lower end of the guidance? And could you also let us know what your assumption with regards to renminbi is for -- that is included in this guidance?

Yes. Our business is not a straightforward business. We have still some market volatility to be expected. We have an uncertain environment. We have the Ukraine, we have the COVID, we have other turbulences in the global economy. So I think the range we have even somehow reflecting the uncertainties we expect in the market. This is mainly what we apply to create the guidance up and lower levels. There's no magic mathematics behind. It's more the assumptions, the estimations we do for the market environment, what we see from the customer, from the demand side and to build in a certain volatility buffer. The RMB, we expect on -- to the euro with the exchange rate of 7.5. I think this is a fair assumption, it's what the RMB is fluctuating around.

Okay. And then given the CapEx level, could you provide us with the split on the major building blocks of the CapEx for the now starting fiscal year? And would you be able to provide us also with the road map going forward already? How much CapEx we should assume on an annual basis?

Fair question, but disclosing CapEx guidance, we refrain to do that. The split is mainly like that, that we -- mainly the investment will come out of Chongqing III. This is the big portion still because the additional 3 lines are coming on stream. And when we talk about CapEx, it's expenditure part, so once the -- as I explained before, once the equipment is coming in, installation is done, qualification is done, the ramp has started, the payout will happen mainly. This is mainly allocated to Chongqing. Kulim is mainly the building part for the period to come. So this is construction activities, a little bit starting potentially with the first infrastructure equipment. And there is also starting a certain portion in Leoben factory out of this EUR 500 million total investment for the next few years.

Then we have another question from Patrick Steiner.

Can you -- do you already have a better view on how to use traditional space in Kulim, maybe an existing large customers, which you don't supply ABF substrates already or possible new long-term partnerships, as you see many major semiconductor companies introducing chiplet technology in the next couple of years? What is your view on that?

As discussed also in earlier calls, of course, sales is not leaning back. And -- so we continue to work. At the moment, we still not have any concrete plans for an additional factory on the site. But as you mentioned, there is sufficient space to expand. And for sure, the sales organization is working on it. And as soon as we have anything concrete, we would definitely announce it to the market.

Okay. Second question would be, given the proposal of this quite strong dividend payment, are you not concerned about the possible weakness in consumer demand for mobile devices? And if yes, how would you be able to cope with it in the current situation, given the ramp-up of Chongqing III and the construction of Kulim going on at the same time?

Yes. As far as the consumer demand is concerned, of course, we closely observe it, and I mentioned also in my presentation that we are looking into buy some volatility. On the other hand, you will see that the IC substrate business continues to gain share in our overall revenue. And as mentioned here, also the part which goes into the server infrastructure is growing which is end of the consumer demand. So we are quite happy with that part of diversification. And Mr. Gerstenmayer has also pointed out that this also helps us in the quarter-by-quarter fluctuations of our revenue. And please also keep in mind that we are very much in the high-end area -- acting in the high end area. And so far, we have seen that the impact of consumer demand, take, for example, the mobile phones, particularly in the lower end, if you look at the very high-end phones, the growth continues to be very, very strong. Again, we are closely observing this. And for sure, we are not completely independent of overall market situation and the economy.

Okay. Very clear. The 1 Chinese player you talked about before, is it Unimicron?

In Taiwan, the main competitor is Unimicron, yes, correct. So that's, I would say, Ibiden, Shinko, Unimicron are the companies which are also serving the high end of the IC substrate marketers.

And we have another question from Daniel Lion.

Yes. Can you give us a little bit more insight on the development regarding growth in terms of unit growth and how much is driven by price inflation? And what would you expect also going forward now starting into this year or maybe also reflected in the guidance, how much of price inflation should we assume?

Difficult to give a percentage here. But definitely, we have been successful in the past year to pass on price increases that we have observed in the raw material area, in particular, at the beginning, it was primarily raw materials. And of course, with a certain time lag, but we leveled it out quite well at the end of the year. So -- to be, I would say, positive 0 on the bottom line. We see now, as contracts are then moving forward, we see the potential to have now a situation that the price increases to our customers exceed what we observe as raw material price increases. What happened now in particular, in the European area is a significant increase of energy cost, but we are confident that we'll be able to pass this on and also here pass on to the customers more than we have to digest on the cost side.