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

Ladies and gentlemen, thank you for standing by. I'm Nadia, your operator today. Welcome, and thank you for joining the AT&S conference call on the results for the first half year 2022/23. [Operator Instructions] I would now like to turn over the conference to Mr. Philipp Gebhardt.

Thank you, Nadia. Good afternoon or morning, ladies and gentlemen. Welcome to the AT&S H1 2022/23 conference call. With us today are Andreas Gerstenmayer, CEO; and Petra Preining, CFO. Mr. Gerstenmayer will start with a brief overview of the key developments of the fiscal year -- half year and the market update. Afterwards, Ms. Preining will comment on the financial figures and our guidance. As Nadia 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 -- good morning, good afternoon from my side -- to our first half year's earnings call. Allow me to get started with the welcome notes to Ms. Preining. On our side, you can imagine I'm happy that we have -- Ms. Preining finally got as our CFO. And yes, I think we will move from here and tried our best to fulfill the expectations of the market. So for today, we have prepared a brief overview, especially also about the market and the recent development of our environment. And I will walk you through that to give you a flavor of what is our view on the latest developments. So starting with Slide 2, what we obviously can see from the numbers, we had a very strong revenue growth of around -- about 53% in the first 6 months, which was driven mainly out of the additional subset capacities in China, Chongqing 3, but also the other business areas like automotive, mobile devices and others contributed nicely to it. We also see that the premium phone, smartphone business, but also mobile devices and all are nicely growing and showing quite some robust situation. Nevertheless, we have also recognized significant FX effects on the top line as well on the bottom line, which will be covered by Ms. Preining later on. Regarding our investment projects, which we are driving in Chongqing, which is coming to end, end of the fiscal year, in Kulim and in Austria, Leoben, they're all fully on track. And also, regarding recruiting, we are nicely moving ahead. So all the projects have also acquired the necessary manpower that is -- was planned. In almost all of the cases we are slightly ahead. I think this is remarkable in the light of the global labor shortage, especially the regional labor shortage in Europe and other places like, also sometimes in Malaysia, which is a competitive market. As you have seen from our release, we were able to confirm the guidance for 2022, 2023 fiscal year, and also our mid-term guidance, 2025, 2026. Just reminding you, the fiscal year guidance is already the increased one which the increase was announced in June, and still, we are able to confirm that. Nevertheless, we have started taking care of foreseeable, more volatile environment in the near future. I'm sure this is not coming as a surprise to anybody, because I think the global economy shows certain impact from energy prices, from inflation and all these kind of things. And I'm also sure you could assume that AT&S could -- will not be able to completely keep itself out of the global economic development. What are we doing, just some examples about that on Slide 3. There were some concerns especially in Europe, we are able -- if there is shortage in energy supply, shortage in gas supply, how can we maintain our operations. Both locations in Austria are equipped in a line that we can switch between gas and oil supply over the short-term. So we are very safe in that regard. And in the long-term, we anyhow plan to move away from fossil energy more towards renewable energies. Like we already have started it in our new projects in Kulim, but also in the R&D center project in Leoben, Austria. Regarding supply chain, which was always a concern in the last calls, we can confirm that we have -- we do not see any significant issues there. It's more or less business as usual with high attention to maintain any upcoming issues, if any. And therefore, we have -- also we can stay there. Supply and sourcing is on a stable situation. Regarding other activities, we are in an intense investment base. So I think it's our responsibility to be careful what is happening around us, if any kind of volatility in terms of demand and other changing market environments would kick in. We will review our CapEx spending profile and decide time to time if there is any adjustment necessary or not. The same is true for our cost and working capital optimization. This is activities we have always running, but we intensified the efforts there, so to be well prepared if anything would happen around us. And for sure, we also observed very closely everything what is happening in the market with our customers' applications, competitors, and so to be able to react and prepare ourselves for any kind of changes. This is just the experience we have gained over years out of several traces we have successfully run through, and also have -- also created the opportunity to strengthen our way forward and improve our performance once the crisis ends. I think this is nothing new, but we, again, need to enter into that special mode because of the latest development of our environment. Mid-term, Slide 4, we are very confident that the big trends like digitalization, electrification of the global society are very strong and robust. They will continue, even if we have potentially now an intermediate phase of kind of market consolidation. We are very convinced that in a certain period of time, things will come back and will be driven by the strong trends. For that, we are very nicely prepared with our technologies, with our capacities and also with our customer portfolio. So also there, our forward -- our outlook is quite positive, and we are very convinced that AT&S will be benefiting from these trends, which also was expressed by the confirmation of the mid-term guidance. Having a bit of an overview of how we see the market segments or the main -- most important market segments we are in, starting on Slide 5 with a market of computing, communication, consumer, which shows a little bit of mixed picture. Computing, especially when it comes to client computing is 2022 a little bit down. It was also reduced from the big COVID peak. On the other hand side, the communication segment is still strong. Transformation towards 5G protocols is still ongoing and showing nice growth and stable growth. And the consumer sentiment, as I said before, is potentially the most impacted one by the current economic environment, driven by the inflation and the energy prices. Long term, as I said, digitalization will support this segment and will also support future growth. Slide 6, automotive, industrial, medical, aerospace. All these businesses have solid growth rates, mainly driven in the automotive area by the need for catching up the backlog generated through the chip crisis or the chip shortage, I should say. They are still in catch-up mode there. The same is true for industrial business. Medical was always strong, had a slight dip in 2020 when the hospital and the treatment of the patients was focusing on COVID patients, but after that the recovery was fast, and is still ongoing and the market is growing. Aerospace is more now turning towards the lower orbit satellites business, which is also supporting communication infrastructure, mainly, and also being driven by the need to provide better connectivity to certain areas on the globe. On Slide 7, you can see that also on the mobile device area, especially the smartphones, the premium phones, which are somehow closely linked to the 5G applications are nicely developing and the transition rate is quite significant over the next couple of years. This is the market AT&S is mainly engaged with. We are not so much engaged with the commoditized markets, and the pure mid or low-end phones and devices still available in the market. So we can grow with the 5G phone market and also have -- observing a quite nice demand sentiment. On Slide 8, it's a quite strange picture, but I think it shows exactly what is happening out there in the market and should give you a little bit of a flavor of what is really keeping us busy in the area of client computing and server computing. So the petrol line here is representing the -- over couple of years development in the client PC area. You can see this was a strong growth trend until 2014, driven by notebook and tablets. Later on, there was a several year lasting declining trends between 2014 and 2020. In 2020, this is what we call the COVID boost. The market significantly recovered, and a lot of customers experience the need for real professional computing. So they also experienced that with notebook, and with smartphones and tablets that they cannot really work. That put the notebook in a new picture. From there, still people will experience further need for notebook applications, but the big boom period is a little bit over. Simply, people are returning to the offices, children returning to school, and so on and so on. But on the mid-term, you see also the dotted petrol line is showing an increasing trend -- or a growing trend, and also shows opportunities to grow. Similar picture, we see with a little bit less seasonality in the server market, which is mainly driven by cloud computing, data centers, artificial intelligence applications, simply summarized by big data applications, that has constantly been growing -- accelerated the growth since 2017, again in 2020, and in average, showing a very nice growth trend for the future as well. How does that impact AT&S business? Mainly when it comes -- this is shown on Slide 9. I will not go in all the details here because we have shown this slide several times already. Just reminding you the technology trends that the architecture of microprocessors is in change from single chip packages to heterogeneous integration, which means chiplets and multi-packages. The impact on the IC subset is, the size or the footprint of the subsets will increase, the layer count will increase, and therefore, also the value of the component substrate will increase. Means we can observe a value-driven growth in that business segment, which is nicely supporting our future outlook in terms of growth and profitability. I simply would switch or jump over Slide 10. I think this is what I already talked about verbally. I immediately go to Slide 11. Here, you can see the growth rates or the development for the IC substrate package solutions. In total, we expect the growth rate between 2022 and 2026 of about 7.1%. Within that, the server business is driven by 6% average growth rate. So this will be the majority of the growth generator. And therefore, it is clear that [ HMS ] in terms of technology, capabilities and capacities over time is more and more focusing on the server business and also being in touch with the most important customers there. Brings me to my last slide. What we are creating with our investment in the area of IC substrate is like, we call it the IC substrate triangle. Why a triangle? On top, we -- there is the upcoming R&D center in Leoben which gives us the opportunity to further provide new technology, innovative technologies for the back end in the semicon industry, for packages and for microprocessors. But on the other hand side, also provides us the opportunity for customer diversification. We try to onboard customers in future through Leoben with new technologies, and then transfer the customers once they are on high-volume production situation to either Chongqing or Kulim. Nevertheless, the intermediate solution, once now the markets are consolidating a little bit. We are already reaching out, or we are already addressed by certain customers in the IC substrate business. And we have already started diversifying the portfolio there, and we are quite successful in doing so. The expectation is that the customers will mainly ramp over the next couple of quarters. We are in qualification with some of them and will also benefit from that activities in the coming quarters and years. So this is very fast. The overview about the latest development. Summarizing, short-term annual guidance confirmed. So we are quite confident that we can achieve that. Mid-term, all the trends are intact. So expectation is that the mid-term guidance will be kept, and we are progressing nicely with all the projects we have in place, and in parallel, we prepare ourselves in case anything is happening on the short-term during the turbulent times around us. And now, I hand over to Ms. Preining to run you through the numbers, and then we are open for your questions.

Thank you very much, Mr. Gerstenmayer, and a very warm welcome also from my side. I'm delighted to run you through the numbers of the first half of the fiscal year 2022,/2023. Some of you might still know me from my recent times at Semperit IG Holdings. So I'm sure I don't need to introduce myself, as my TV is also public. But one thing I have to stress, however, it's a very comforting situation to have the first half year call presenting such good numbers, even though the credit for those numbers are definitely to be found with the Board of my -- or the colleagues -- my colleagues, Mr. Gerstenmayer, Mr. Schneider as well as the entire AT&S team. Turning the page. Thank you very much. Mr. Gerstenmayer has already pointed towards a very, very nice result. We have been able to achieve for the very first time, revenue of more than EUR 1 billion -- to be very precise, 1.07, which also leads to an increase of 53%. This turns into an EBITDA margin. EBITDA reported of 29.5% and an EBITDA adjusted margin of 31.3%. EBITDA adjusted -- just for your information, unless it's not clear, it excludes the start-up costs for materials and wages in relation to our investments -- our big CapEx investments. One important information which we have also highlighted on this first slide, is that the positive top line growth is also affected by tailwinds of FX effect in the amount of EUR 116 million. The important exchange rates to be mentioned in that respect is the Hong Kong dollar and U.S. dollar. Turning the page now, what we have said as a teaser on Page #1 is now written in absolute numbers. So the EUR 1.07 billion in revenue turns into EUR 315 million in EBITDA, which leads to 141% increase from the previous period half year 1, 2021/2022. Even better, I'm very delighted to present the increase in net profit. We are able to present the net profit of EUR 224 million, which leads to an unbelievable 1,129% increase. I have to be very honest, I have never had the chance to read out such a number and present such a number. Let's see how this will develop further. Where does this revenue increase come from, Mr. Gerstenmayer has already pointed to it. Clearly on the back of our CapEx increase in Chongqing. When you look at the EBITDA reported column in the middle of the slide, the increase is highly driven by our business unit, MS. Turning the page, as we not only report half year, we also obviously report quarterly results, this is mirroring the results I have just explained to you, is also on a quarter-by-quarter development. We show a very nice increase of 49%, which leads to a record level, which we have never had been able to present before. As mentioned already, growth mainly driven by increased capacity coming from Chongqing, higher revenues, and the tailwind of FX effects also improved the margins. Looking into the business units, starting with mobile devices and substrates. This slide very much is a copy of what we have just seen. That makes it very obvious where the increase comes from. Chongqing capacity as said, driven by a very strong demand for PCB for models, also clearly increase the EBITDA margin. On the business unit, AIM, Automotive, Industrial and Medical, a picture you might have seen in the past. Though we are very pleased with the increase of the top line by 21% quarter-over-quarter, also supported by FX, we see the margin clearly under pressure. You might ask why is this. The answer to this is driven by the start-up cost and higher R&D expenditure here in Leoben on-site, but as well from IPCEI funding. IPCEI spend for important projects of common European interest. Here, we have a delay in receiving the grant. So we do have the cost in our books, but the grant will be received as scheduled now in Q3 for this fiscal year. On the next 2 slides, I would assume the points which might interest you most. Our financial position, starting with cash and cash equivalents and unused credit lines. We have a very, very solid balance sheet, which shows EUR 1.341 billion cash and cash equivalents and unused credit lines. This is clearly -- there is a clear header over those -- with this balance, which is reserved and meant for our strategic growth projects. Additionally, we -- as you do know, we have been able to sign and close the hybrid bond placements by the last quarter of the last fiscal year, which was very successfully signed. Turning the page, the debt side of financing. Here, we show you the maturity and outstanding debt instrument. There are couple of things I would very much like to share with you. Point number one, no significant repayments are due this fiscal year. Point number two, EUR 421 million which you see, which is more than 1 year or less than 1 year, due in the next 12 months, are already secured according to our liquid planning. Point number three, a little shy of 50% of our debt instruments have fixed interest rates, so are not affected by interest increases. Point number four, our current financing costs are at 1.4%, which will clearly increase over time. But as I just mentioned, only affected by approximately half of the debt. And finally, as you do know, we also will receive sort of customer payment -- prepayments over the coming period. On the balance sheet, I've brought 4 KPIs for you, which might not come as a surprise. Total assets have increased by 15%, of course, on the back of our ongoing expansion and customer prepayments. Equity also nicely increased by 19%, clearly driven by the very good results and FX translation effects, leaving us with an equity ratio of 34.5%, 1.1 percentage points higher than in March 31st, 2022. Finally, a net debt-to-EBITDA ratio of 0.6, which equals the ratio we have been able to present at the end of the last fiscal year. All this leads obviously to the last financial slide, which is reserved for the cash flow. The cash flow from operating activities very nicely increased to EUR 336 million -- EUR 366 million, of course on the back of better results and customer prepayments. The cash flow from investing activities will not come as a surprise to you based on the growth CapEx projects. Mr. Gerstenmayer has just restated and presented to you, which leaves us with an operating free cash flow of minus EUR 124 million. Finally, and in line of what Mr. Gerstenmayer has already confirmed to you, we have been able to confirm our guidance with the full -- sorry, we have been able to confirm the guidance with a mid-single percentage range below the higher number we have shared in June with you, which is in line with the usual market -- capital markets communication. All other KPIs and data, which have been communicated to you in June, remain unchanged. Although unchanged is the mid-term guidance we have been presenting to you in September last year. We are based on the explanation Mr. Gerstenmayer has shared with you earlier, convinced that the revenue of EUR 3.5 billion is achievable in the period 2025/2026. This is it from my side. Thank you very much. I hand back to Mr. Gebhardt, who will now take your questions.

Yes. Thank you, Mr. Gerstenmayer. Thank you, Ms. Preining. We will now start the Q&A. And in order to give everyone the opportunity to raise questions, we would like to ask you to limit yourself to 2 questions. Once we are through, if there are still questions and still time, we will start another round. Now I would like to hand over to Nadia to handle the session.

[Operator Instructions] The first question comes from Patrick Steiner.

I've got 2 questions. The first one would be, we've seen that Intel, AMD have been reporting substantial declines in the sales and operating profit in the client business over the last 2 to 3 quarters, mainly due to lower consumer demand, OEM inventory reductions and lower ASPs. Could you give us some more information how this effect, or will affect your ABF substrate business in terms of volume demand, pricing, plant utilization, for example? And if there's any chance to increase the service share in the product mix as a result?

Yes, typically, we are not commenting on specific customers, but I can comment on the market segment. What we see is, and what I also stated before, is, the more consumer-related demand has seen some impact from the economic environment. This is true. This also we could observe. On the other hand side, the server cloud computing business showed quite stable demand situation. So it's a mixed signal out of the market. Therefore, what we expect for the second half year is to stay on lower volumes demand situation in the client computing area because that is related to the consumer sentiment. This is what I can state from the view on the market, from my point of view.

Could you offset this with higher capacities for [ service ] substrates, for example? Or does it simply reduce plant utilization?

This is difficult from today's point of view to predict because finally, it ends up how we can, or how successful we will be in terms of share allocation and so on. We need to observe closely. Like I said before, we are in close contact with all potential customers. And yes, we will work from there. But as you see, we have confirmed our guidance for the year. So probably also from there, you can derive what our expectations are in total.

Second question would be the figures decline in this kind of -- in this midsingle-digit percentage range based on your prior EUR 2.2 billion revenue guidance. This means something roughly like EUR 50 million to EUR 150 million expected top line reduction in the next -- based on the next 2 quarters. Could you give us a rough split and where you expected kind of top line reduction to come from, such as like percentage PCB module and why percentage [ grind ] substrates or something like that?

Missing decrease -- is missing a decrease. That pointed, that's nothing uncommon within the bandwidth. We have with an unusual bandwidth you report on the capital markets. Please accept that this is the level of detail we are happy to share with you at that point in time.

And the next question comes from Alexander Thiel.

2 questions from me as well. First one is regarding the D&A rate that you have shown so far in the first half of this year. Would this be also a great proxy for the second half of the year? And on your tax rate, basically the [ pay ] is we're at 9% tax rate, I think, for H1?

You meant depreciation and amortization was the first question?

Yes.

So I will take the second question first. The tax rate will remain on the level of the first half which you have stated, and depreciation is in line with our current CapEx projects.

Daniel, I think you are next.

The next question comes from Daniel Lion.

Yes. I would have also 2 questions, maybe also catching up on the demand dynamics. When we refer now to the slightly adjusted top line outlook, on the one hand, where does it come from? And then, I would be interested, if you already see this development in your areas, in your business lines? Or do you expect this to see happen? Is there a difference in your expectations regarding Q3 and Q4? And maybe a little bit of more transparency would definitely be what we welcome because it's difficult to really get a hold on.

Yes, I tried to explain it the questions from Mr. Steiner already. So basically, what we see is, the main impact is coming from the consumer sentiment, consumer-related markets. As you also can see that we try to create more than usual transparency in announcing already that we are within this 0 digit percentage reduction rate. So this is what we typically are, potentially not so much forced to communicate, but we thought it would be helpful for everyone in the market. There is some volatility in the market. There is some uncertainty in the market, and we wanted to communicate that. So this is what we can see from today's point of view. How our business will -- potentially will be impacted? Mainly as I said before, one of the impacting factors definitely is expected to come out of the client computing area. And then the rest, I would not see any significant changes.

And maybe also connected to this issue, and I think [ consequences ] to some extent. Maybe replacing it a little bit in angle. The ramp-up of the heterogeneous server CPUs at your plan is basically set to last, let's say, 2 quarters, or roughly 2 quarters. Do you have any visibility how this will play out on your side? And once this mass [indiscernible] or pulls up, would you expect that stability of your business will be massively reduced again?