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

Ladies and gentlemen, thank you for standing by. I am Alexander, your operator today. Welcome, and thank you for joining the AT&S 9 Months 2022-'23 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Philipp Gebhardt. Please go ahead.

Good afternoon and morning, ladies and gentlemen. Welcome to the AT&S 9 Months 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 first 9 months and especially on Q3, as well as a market update. Afterwards, Ms. Preining will comment on the financial figures and our guidance. As Alexander 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 a very warm welcome to everyone wherever you participate. Good morning, good afternoon or good evening. In the beginning I have to apologize, I'm not sure whether you have a good line. On our side, the line is a bit unstable. So, I hope we can later on receive your question properly, but don't be surprised if we have to ask the one or the other. Yes, let's move to the third quarter results of AT&S. We have started the fiscal year very nicely. If you have seen in the half year's results when the market is stable and the demand is strong, we can show a very competitive performance, both in revenue generation and also in profitability. But you all know, since of all time, the market conditions have significantly changed, especially in the tech industry. And I also see it, we are not the first one who have to announce lower business volumes just recently. And as it is, you cannot plan for everything. And unfortunately, the latest information we received the last few days, forced us to do the talk announcement yesterday. It also shows that what we have so far communicated during the last call that visibility in the given environment is quite low. This is one of the dominating factors in the business, which makes it a bit challenging. And I can assume some of you will ask later about the -- our forecast for the next quarter and the following quarters. I can already state here, it is difficult still to really predict what will be the volumes, especially when it turns to the new fiscal year. From today's point of view, I cannot give you a guidance for the next fiscal year. So far, we are still calculating investigating, talking to our customers and whatever we can do, so to create a solid consolidated picture. Once we have that, we hope we can do that as we do it typically with our annual earnings call in May time frame. I ask for your patience until then because the market conditions are not good enough to throw out any kind of solid numbers so far. And as you will see in the presentation, we are anyhow preparing for this and are prepared for this environment we are in currently. So, the low visibility requires very, let's call it, agile management. And this is what we always did. We did it in the COVID environment. We did it before. So far, we were successful in managing that and we apply the same pattern, the same tools we have in place also this time. And this is what we can do. We cannot change the market. We cannot change the demand side, but we can manage it. And we can talk about the long-term or midterm part because there is still a lot of opportunities available and we see a solid technology and market trends that point to a more stable development in the future. Coming to the details of the quarter 3, we have different impacting factors. Some of them I have already communicated now or commented on, for sure, we had also to fight with the COVID situation in China in Q3, our calendar quarter 4 for sure. There was also the shutdown of the one or the other area and part of China, where there was a lot of shutdown in some of the factories of our customers, some partners in the supply chain, which has impacted the sourcing and also the demand side. But nevertheless, I think we have managed quite well. Our factories from an operational point of view were not impacted by that and we could manage through the situation. Nevertheless, if the next partner in the supply chain is missing, it is also not a very favorable situation. We all have seen from the reports of the microelectronics industry that especially impacting the computing area, notebooks, client computing and so on is significant. All market participants are showing quite some weakness there. The server part is a little bit less impacted, but still there is also some weakness because the hyperscalers are hesitating to do their full investment they originally have planned for. Also, they are managing through these turbulent times and they are managing their investment and their CapEx spend. Positive. We have started to talk about our module business we created a few years ago. This still is on a very good track, is still nicely developing and also contributing already to the market. I think it's a 3-digit revenue participation. And I think this has shown quite successful implementation. For sure, we have also significant FX effects in our top and our bottom line, more on the top, but that details, Ms. Preining will comment later on. As you have seen yesterday, we had to adjust the guidance for the running fiscal year. I just wanted to comment on that because in some of the releases there was mention we have adjusted it a second time. Yes, that's true. But we also have adjusted it upwards in summer in the very good market conditions. And so it's up and 2 down. And finally, it's negative, but not so negative, like it looks like currently. And as I said before, we have initiated a lot of activities, measures to take to navigate through the current situation, cost efficiency, cost control, CapEx control, whatever we can leverage we are doing. We have started that already in our fiscal quarter 2 and continue to accelerate the activities to support the current situation and to support the numbers generated. In numbers on Slide 3 here, you can see some in view about the market. I will not go in each and every detail here. The light blue bar is the last fiscal year -- last calendar year's numbers. Left-hand side, the server business. You can see the 2022 server was quite strong. It was a bit front-loaded. The most upward generated business was created in the first 2 calendar quarters. The further development throughout the year was a bit more flat. But what we foresee for the running calendar year 2023, it will come down to, I would say, normal levels like we have seen it in the past, but still showing a nice growth trend for the upcoming years. Notebook and client computing. Here, you can nicely see what happened during the COVID situation. 2020-2021, there was a significant uptake on demand. Now with the current environment, COVID ending, inflation, energy price increase, consumer sentiment significantly down. Also the demand here came down and is also expected to come further down 2023. But still, we are above the levels of 2019. And also the expectation is once the general economic environment recovers. Also there, we will see a certain growth again because the replacement cycle has not completely finished. PCB market, also in the future, a nice growth. In 2022-2023, there was a certain decline. Also, on the one hand side, generated out of the ending COVID hype, again, closely linked with the Computing segment and also some impact from the consumer markets. But expectation is somewhere end of 2023 and beyond recovery should take place. This is what we have available from the market intelligence and this is how we are simulating our future demands. Similar picture in the Automotive, Industrial, Medical, Aerospace part. The weakness of the Automotive segment mainly caused by the chip shortage over the last couple of years should come to an end and should also take up again in the growth rates, especially driven by the 2 trends of electrification, which is the stronger trend, but we should also not underestimate the autonomous driving, even if it's not so much used in Europe. We see a lot of activities in China and other markets. And most likely China and U.S. will overtake Europe in implementing this functionality in terms of autonomous driving. As I said before, we have initiated already in fiscal quarter 2, our -- not initiated, accelerated our optimization projects in terms of efficiency, productivity in all areas and we will accelerate them further. So, expectation is that we will achieve a sustainable cost optimization of at least EUR 180 million beyond -- in 2023-2024 and beyond. As here stated in this one bullet, further programs are under consideration. And for sure, we will align our CapEx spending profile with the demand profile we see from the market. I need to potentially explain that a little bit. For example, when we talk about the project in Kulim, we are now still in constructing the buildings. Then we have a next milestone where we can decide how to proceed. First of all, it's always the factory shell is finished. We call it wind and water tight. Then you -- if the demand is there, you continue. If the demand is potentially weak, you can stop or push it out for a while. Next step would be infrastructure equipment, things like that. Again, until then, that is finished and we have power on in the factories, we can decide whether we install all the expensive, important production equipment or not. And once that is done, then the production will begin to ramp, will begin to be operated and we need to ramp one line after the other. So, this is important milestones and this gives us also the opportunity in uncertain environment that we can adjust CapEx spending according to the market demand. But for sure, once the factory is there, it needs to be operated and fully loaded. Just to give you a little bit of flavor of the background, how we manage that. This is not unusual. We have done that several times in the same pattern. When we ramped Shanghai, when we ramped Chongqing, we had similar situations all the time that we had to adjust and are adjusting the capacity implementation. Okay. This is a bit about the market environment, how we see the situation in the market, summarizing and also giving a lead to Ms. Preining later on. The trends that are in the market, especially when it comes to electrification and digitalization are still valid and very strong. The current situation is not caused by a weakness in the trend. The current situation is caused by the global economical environment like we see it today, increasing interest rates, high inflation rates uncertainty of the consumer sentiments, energy prices going up and all these kind of things. So people are hesitating to invest in more expensive, more valued goods. And the question is how long that will stay from the market intelligence and also from other market participants, the assumption is it will stay at least the next 2 quarters. This is the time at least where we need to manage through and observe closely what will be the further environment developing. And therefore, we are adjusting our reins like I described before. Now, I hand over to Ms. Preining to guide you through the numbers.

Thank you very much, and a warm welcome also from my side. Allow me to start with Slide #7, as this is meant to be the normal Q3 earnings call. I will then wrap it up at the very end and come back to yesterday's capital market information. As Mr. Gerstenmayer has mentioned already, we had a very nice first half year. We, as I find had also an appealing Q3 leading in total to a revenue of a little shy of EUR 1.5 billion. To be exact, EUR 1.489 billion, which shows an increase of 30%. The 30% is as we have heard already impacted by FX gains. But even without those FX gains, 17% year-over-year increase is a very nice improvement given the headwinds, the general geopolitical situation as the market has shown. The revenue is supported by the -- by both BUs. Mobile Device and Substrates grew almost equally 34% in year-to-date numbers. The division AIM, Automotive, Industrial, Medical, grew by 19%, strongly supported by the division Automotive. The EBITDA year-to-date Q3 led to EUR 416 million, grew very impressively by 71%. Although here, even without FX effect, 29%, which we deem very appealing number. The EBITDA margin was up by 6.7 percentage points and reached 28%. On adjusted levels, we have even reached 30.4%. Net profit shows a number of EUR 221 million and increased by amazing 260%. Also here, 41% without currency effect, showing that we have already managed in the last quarters to increase our efficiency and our productivity. Turning the page, the quarterly revenue and EBITDA margin development, as you can imagine and we have already stated shows a weaker Q3 compared to the very strong first 2 quarters, as we have stated. The adjusted EBITDA margin as of year-to-date Q3 remains at a very satisfying level of 28%, which was, as we have already stated, supported by the measures we have implemented in Q2. The business development, Mobile Devices and Substrates, turning to Page #9 shows a decrease of 13%. You see already in Q3 the quite steep decline mainly driven by IC substrates. This is the development. We also see forward-looking where I will come back to in a few moments. The EBITDA margin was -- came already compared to the first 2 quarters under pressure. On Automotive, Industrial and Medical, we see a steady growth of 17%, which, as already said, is strongly supported by automotive. The EBITDA margin still reflects the start-up cost and the higher R&D expense, which as we have already stated in the past quarters. This is driven by our R&D project here in Leoben, our R&D center. What is important to mention that due to timing difference, we still expect the grants to come in Q4. So, that will turn out when looking at Q4. Turning the page to the financial position, we see that cash and cash equivalents has decreased from March 2022 to December 2022 and almost at the same level we have increased our unused credit lines. This does not come by surprise. This is a sign of the deployment we have due to our large CapEx projects and also gives you the comfort that AT&S is in a position to also finance the upcoming projects with the unused credit lines, which we have -- so we are prepared for the deployment of the next tranches when it comes to CapEx. On debt financing, similarly to what I was able to tell you last quarter, we have roughly 40% at a fixed interest rate. We, more and more diversify our products to be in a very good position when it comes to different opportunities. Currently, at the current status, we talk about 2% of financing costs as of December last year. And as you do know, we also do expect further customer prepayments to come. Turning the page to the balance sheet, I don't think anything will come as a surprise. Total assets have [ rise ] due to the CapEx project we have mentioned a couple of times already. The equity ratio still remains strong. But of course, due to the deployment of the CapEx of the assets, the increase of the assets, we see a slight decrease to 32%. Net debt at 1.2x higher than what we had at the half year, but in line with our deployment of -- when it comes to the projects. Our cash flow year-to-date as of December remained very strong, which was supported by very good results and customer prepayments. The deviation compared to last year when it comes to investing activities is, of course, due to the CapEx we have mentioned a couple of times today already. Allow me now to say some words on yesterday's profit warning. The capital market information was triggered by a significant reduction in IC substrate orders due to high inventories in the market. In the light of the magnitude and the obvious short notice, we will face a very disappointing Q4 with an EBITDA adjusted likely to be below 0. Further countermeasures, as Mr. Gerstenmayer has already mentioned, are evaluated and aligned with the magnitude and duration of the demand shortage. I further am allowed to tell you that the management in alignment with the trends Mr. Gerstenmayer has already elaborated on earlier, confirms the midterm outlook as we had it before. So, the outer years, the guidance for the years, '25-'26 remain unchanged. With this, I've come to an end on my part, and I'll hand over to Mr. Gerstenmayer and your questions basically.

Yes. I might jump in. Appreciate. Thank you, Mr. Gerstenmayer. Thank you, Ms. Preining. We will now start the Q&A. [Operator Instructions] Now, I would like to hand over to Alexander to handle the session.

[Operator Instructions] And the first question comes from Daniel Lion.

Indeed, a very demanding environment. And of course, very difficult to provide short-term guidance. Maybe I'll just try differently. When we look at the specialty IT trends, which are the issue at the moment, and we look at the leverage or IC substrate suppliers have compared to the OEMs, given the 8x bigger requirement for production capacity for each CPU, for each heterogenous CPU, wouldn't you expect that IC substrate suppliers would actually rebound faster than the OEMs? First part. And the second part, by when would you expect when you look at the transition now towards heterogeneous CPUs, when would you expect to be roughly back on track towards your midterm guidance, as we have maybe you had expected to see maybe half a year ago?

Okay. Let's try to answer that. First of all, about the question, the production leverage. I have to mention, first of all, we all know that quite some of those products have been delayed in the market introduction. For us, it's not -- so far not visible how the design-in cycles will be achieved, how the design-in cycles will accelerate the demand side because this is not the business relationship we have visibility about. This is one part. So, we need to wait until we get a proper forecasting from our customers in that regard. Once the business is taking up, we should not underestimate also from the other side, the total value of the component is not just defined by production capacities. If you sell a complete CPU, you have more than just a component here, you generate software and sometimes also services behind. This for us is not easy to judge on. For us, at least, as I said before, we are lacking sufficient visibility also due to the reasons I just explained how is the design-in of these new products. And yes, that we need to observe closer and continue to observe. And it's not good to say, but we have to wait until the new forecasts are kicking in.

Okay. Maybe a follow-up on this one. We are actually starting from actually 0 EBITDA when we take the fourth quarter and going into next year. What would you need in order to come back to former performances also in terms of profitability, in terms of market development, is it enough to work off the excess inventories? Or do we need to return to a level of market demand level like we've seen it a year ago? Or what's actually the environment that you need in order to be back at this -- at the level we want to see it.

I understand the question. If it's just a consumption of the heavy inventories, then we also need to assume that, first of all, what is the demand behind the consumption of the inventories and how fast that is. If the consumption is accelerating, still, the question is what is the underlying demand curve and how to refill the pipeline. So, at least if we would come to a level that we have a better balanced stock levels and a continuous outflow of product, so the demand should show a stable situation, so that the consumption and the turnover of the stock volumes is sufficient. Yes, but then we anyhow have a combination of a strong market demand and the consumption of the products provided. So, you cannot decouple it.

And the next question comes from Alexander Thiel.

Alexander Thiel from Jefferies. A couple of points from my side. The first one would be on your guidance definition. Your guide for around EUR 1.8 billion, how much range of fluctuation is underlying your own definition on your slide?

Will you raise the second question or shall I answer this one right away?

I can ask them.

No, no, it's okay. You just mentioned you have several questions, so that's why I was waiting. You do know the usual game of market communication. Usually, we talk about bandwidth. Now the year, our fiscal year will end in 2 months from now. We have even though that the transparency or the visibility is limited, we do believe that we have a quite good understanding of what we are against for that particular year. So, we see the guidance of EUR 1.8 billion, quite solid. But frankly speaking, we always have a bandwidth when we talk to the capital market.

My second one is basically how we should think about the overlap between the Intel Raptor, the 13th generation chip and the following chip, which is already launching end of '23. I mean, how do you basically prepare for that kind of overlap together with Intel? And a follow-up question that would be if Intel has already started pricing discussions for IC substrates?

How to prepare for the overlap. I think typically, we have different generations of products in the pipeline all the time. So starting with, for example, Sapphire Rapids, which is just introduced to the market somewhere in January already. And the next one, the Granite Rapids to come. For us, it's -- I think it's business as usual. So, we start ramping the one and we prepare and qualify the next one. And once the demand kicks in and the approvals and releases are there, then we start producing. So, there's nothing special for that. The special thing is more on the customer side. Is he able to communicate to his customers very frequent change of products in a similar field and how is that appreciated by the customers and how is that, as I said before, the design-in. Are they all accepting Sapphire Rapids and I would mix the name before, it was, I think, Emerald Rapids. But it could also happen that one or the other customer waits for the second generation, but this is not in our field of influence and it's not for us to predict on that. As I said before, it's unfortunate, but we need to observe the market and need to wait until we see how the new products are taken up and the demand develops further. So new products, new opportunities, hopefully, customers will appreciate them and design them in. A question about price negotiation never ended. So for sure, in situations where market provides more capacity, the situation is more intense than it was in the past when we had a very favorable situation that it was more a supplier market. Now it turns again, more to a customer market. Also nothing very special on that regard. This is the typical fluctuation we have always dealt with.

And the next question comes from Jurgen Wagner.

Actually, I have one on substrate pricing. You mentioned in the past when those Taiwanese competitors reported strong increases in spot pricing that you were not really tied to the spot market. Now, prices, spot prices going down, does that, yes, does that still hold also on the downside? And I assume the substrate capacity is underutilized. What will happen to the products you currently produce? Or can you reuse them or reuse the capacity for other clients or even other markets?

Okay. Let's start with the spot pricing. Typically, IC substrate business is not the spot price market. So, it's a very custom-made, custom unique and product unique component. So, referring to what I have said before. If you build IC substrate for Sapphire Rapids, it's only to be used for Sapphire Rapids, because it's a very specific design-only fitting for that. Typically, allocations are done quite ahead of shipments. Shares are distributed over the qualified suppliers. You cannot just move from one supplier to the other. If he is not qualified for the product, he is not allowed to ship. It's very dedicated, high-level technology. And typically, it takes us some years to get started with a new generation of product to prepare all the processes, to qualify the processes and be qualified for a new generation. So, not really a spot market. And I think this is also an answer to your second question. Single-use, because it's only one product, one customer, you can use the substrate.

And the next question comes from Patrick Steiner.

Patrick Steiner from Kepler Cheuvreux. I have 2 questions. We will process them one by one. First one would be in their earnings call, your largest customer stated that they are on track to ship 1 million of the new Sapphire Rapids chips by midyear 2023. Can you give us more context on that from your side? I mean, what are the implications for AT&S in terms of revenue, utilization, et cetera? And how will the volume mix be between substrates for the new server chips, Sapphire Rapids and for the Ice Lake legacy server chips?

I think you know it, we cannot comment on single customer situation, especially when it comes to our relationship, potential customer. I can only comment in general. And I think I can only refer what I have said before. Typically, there can be an announcement of a market participant, he intends to ship. Whether he is really able to sell them is a second question because it relates completely to the design-in at the customers. So, this is the mechanics how the market works. So, even if I would call and talk about the customer, I could not tell.