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

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

Thank you, Ulrica. Good afternoon or morning, ladies and gentlemen. Welcome to the AT & S Full year 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 year and especially on Q4 as well as a market update. Afterwards, Mr. Preining will comment on the financial figures and our guidance. As Ulrica 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.

Thanks, Philipp, and good afternoon, good morning to our 2022 2023 earnings call. I'm sure you have seen already our announcements we have published already this morning. Let's jump into the key developments of the last fiscal year. So as you have seen from numerous disclosures we had to make throughout the year, it was a quite mixed situation in the market. So we had a very successful and strong first half year, which brought us to a record numbers in the half year's earnings call. And we had to enter and to face a quite challenging second half year of the fiscal year, mainly caused by certain weaknesses in the market environment, especially focusing on the semiconductor, microelectronics and IC substrate markets. I think it's just brief to -- worth to mention a little bit about the impacting factors how we have seen them and how we see them still with a discussion about increasing energy prices, increasing inflation, slowing down of COVID and the restrictions like shutdowns, the demand situation in the market, especially in the consumer market in the second half of our fiscal year slowed down significantly. That was firsthand impacting our IC substrate business, where we had to consider that demand is slowing down. And also over the time, the inventory levels have piled up over the quarters. You have also seen that we have initiated significant cost saving programs to be prepared for that situation and to manage the situation. Here, we can clearly stay we're well on track. We see already a nice impact. But nevertheless, it's a volatile environment with, I would say, still low visibility. The good thing is, and we'd shared, there is always light customer and regional diversification is well on track. We could speed up also our adding new customers to our portfolio and with the projects in Kulim and in Austria, which are also nicely progressing. We could also diversify our regional set up already, and we are executing according to our plans communicated. What we foresee for the running fiscal year, and this is what we hear from the market and from the market analysts that there could be some uptake of the market in the second half of '23, '24. As I said, needs to be observed closely. But what is already -- what we can already see is that the inventory levels are going down. So this is the first important step, which will help us by creating new demand. New products are coming to the market. New products are about to be issued to the market. And last but not least, the expectation is that at least a certain recovery in some parts of the market will happen until the end of the fiscal year. We are still confident that we can achieve our midterm guidance. We have pushed out by 1 year due to market conditions. But nevertheless, we stick to our guidance here and work hard to achieve it. Moving to the next slide, some words about the markets, how we see them, how we have experienced the latest development, starting with the IC substrate market on the left-hand side of the slide. The server market, you see is still until 2022. Strong development growth year-over-year by 10%. But also this market has slowed down in the light of the economic environment. Expectation in that market for the year '23 is that we see a flat demand development after that recovery should be expected to be strong and returning to a quite healthy growth rates of about 7% average. On the right-hand side, notebooks here, you clearly see what I have mentioned before. Consumer sentiment suffered more. We have already seen in 2022, a decline in the notebook market demand by almost 18%, and we foresee further decline in 2023, fully in line with the global consumer behavior and the resistance to invest in devices like notebooks and other electronic devices. So the focus for consumers has moved away from devices to more consumption, traveling and so on. And this is what we see. But the expectation is that this will normalize after '23 and coming back to also here a nice growth rate of around about 4% average. Still, what needs to be mentioned here is the even lower or lowest part in 20 -- level in '23 still above 2019 numbers before COVID. So market is stronger than 2019 started. And from there, we will hopefully see the recovery with 2024. Moving to the next slide about the PCB market segments, which is the clusters of computing communication consumer. It's a similar picture here as well. Computing, communication, consumer is slowing down or almost flat for 2023 and a nice recovery in the years after by 5% average growth is expected. What we see also is that still the communication infrastructure is still healthy, which is mainly related to the 5G network installation globally, which is continuously going on. And this gives also a good indication that also on the device level, the rollout of the 5G devices is ongoing. In the Automotive, Industrial, Medical and Aerospace segment, quite stable situation, but also there due to different impacting factors. The expectation is that another growth wave could start with 2024. To make one deep dive on the smartphone market, just to show you what mechanics are there. The overall smartphone shipment, this is now here millions per year declined significantly between '21, '22 and a small decline is expected to happen in '23. If you have a closer look to the iOS devices, you see they are much more stable. They have a significant lower decline in 2022 and keeps -- will stay stable in the ongoing years. So obviously, the iOS segment is much more robust against this kind of volatility in downturns like the rest of the business the smartphones is, and this was also a certain level of confidence we can create moving forward. As I said in the beginning, we had initiated and intensified significantly our efficiency and cost saving programs. On the OpEx side, the savings plan for the next 2 years, this year and next fiscal year is EUR 440 million combined. There is a portion of sustainable and nonsustainable savings in there, it's cost cutting and really efficiency gains with a mixture here and the portfolio of measures and actions initiated, we are quite confident that we can well prepare ourselves for the rough sea we are in today and also take benefit once the market is recovering afterwards to be on a quite competitive cost level later. CapEx, we also have communicated that we pushed out some of the investment like one plant in Kulim, which is still about to be fully finalized in terms of the factory shell, as said, this will stop at the status wind and water tide with some safety installations to take care about the sustainability of the building. And the other one is just moving ahead, has already achieved equipment move-in status and first equipment is installed almost every equipment for infrastructure is in there and up and running. And we are about to start qualification of the first production equipment already. So still the plan is to get -- or to achieve the milestone for ramp in 2024. We have also disclosed already with our announcement that we -- with the 1st of April, we have changed our segment reporting structure and our operating system. We were over the years, several times you're asked and required to bring more transparency in there. And we also decided that it would be a more straightforward lean organization if we split it up in microelectronics, which is more or less the IC substrate business and our Electronics Solutions business, which is mainly covering the PCB business. On the slide, you can see the underlying market segments in PCB, it stays like it was in the past, mobile devices, automotive, aerospace, industrial, medical. And with the allocation of plants to the new business units, we have the R&D center in Leoben and the rest of the location, including Chongqing I, III and the new plant in Malaysia. And the Electronic Solutions contains Shanghai, Chongqing II with the module business, Nanjangud, Korea and the second plant in Austria, Fehring. We are quite convinced that this is a good move for us to be more straightforward in terms of execution of our business also to generate synergies out of the business segments to combine technologies and processes under each of the business units' roof. And we also expect that it will also be appreciated by the investors because it's significantly more transparent to talk about the big investment projects in IC substrates under one business unit and showing also the related business development and performance, and the same is true for the PCB business under the Electronic Solutions business unit. As said, before expansion Kulim and Leoben, both are very nice on track according to the latest communication. Yes, we have the first machines in start of production till 2024 and we open the same with the schedule machine, first machines have moved in and start of production is in 2024 as well. So this was my short overview about the latest development, the most key topics we wanted to talk about after the last fiscal year, and I hand now over to Petra to walk you through the numbers and the more thrilling things.

Thank you very much, and also a warm welcome from my side. I have the pleasure to present the full year 2022, 2023 earnings today. For me, having joined on 1st of October 2022, this year feels like 2 entirely separated years. As Mr. Gerstenmayer has already said, the first year very nicely supported by strong market demand, strong tailwinds when it comes to FX and then the turnaround in starting Q3, Q4. We are very pleased with the first half. We are also still quite nicely -- we have nicely delivered Q3 results. To be very frank, we are not happy with Q4. It's way below our expectation and the expectation of the HNS team. However, it's in line with what we have told you and the market on 1st of February this year. We have, again, and even though so more importantly, outperformed the prior year by achieving almost 1.8 in revenue and EUR 470 million in EBITDA, which is give and take exactly what we have told you on 1st of February, it's slightly above the numbers we have shared. So even in those really bumpy times when transparency is limited, the forecast, the guidance we gave on 1st of February was, I have to say, spot on when it comes to the full year numbers. What we also do see that the result, even though we're very happy with the performance, especially for the first half and the third quarter was clearly impacted and influenced by the market developments starting Q3. On the other side, also highly impacted by exogenous factors like inflation, like interest, like the concern for recession and the overall market situation. AT & S has managed to also take advantage of the FX tailwind, which brings us to a net profit of EUR 137 million for the year. In alignment what Mr. Gerstenmayer has already said, we have used the fourth quarter to bring AT & S into a position not only to lift the efficiency gains, which we have already announced in Q3, but also furthermore aligned the cost structure to the current situation to allow AT & S to recover in the year 2023, 2024 coming from a very low and, as I said, disappointing Q4 last year. Turning the page. By looking at the numbers on a quarterly basis, as already said, the Q4 2022 to 2023 is the far the lowest we have achieved in the last couple of quarters and is highly impacted by the lower volumes for IC substrates. Over and above the lower volume in times where there is overcapacity and low demand, the price pressure significantly has increased in Q4 2022, 2023. As said, the measures implemented will support and are already supporting the margin forward looking. Over to the next page, on the BU Mobile Devices & Substrates, as Mr. Gerstenmayer has just presented to you, this is the last time when we show the business units in the old structure. You can clearly see that with EUR 189 million, the problem is located in that particular business unit where we see weak market environment for substrates and over and above compared to Q4 2021, 2022, also a lack of new products in spring when it comes to mobile devices. The same, as I said already, applies, of course, to the BU Mobile Devices & Substrates when we talk about EBITDA and EBITDA margins, highly impacted by significant price pressure to the current overcapacity in the market. Turning the page on the BU AM, Automotive, Industrial, Medical. We see a very resilient and stable revenue development, showing an increase from Q4 2021, 2022 to the last quarter of the last fiscal year of 4%. We also do see similar to last year same time, the margin increase due to the European IPCEI funding, not only it's the funding but mainly related to IPCEI funding. What we also do see and as we have reported over the last quarters already, in this BU, we also allocate the start-up costs for our R&D center here in Leoben and Hinterberg. Therefore, the margins get more pressure than purely from operational business. In times like this, I'm pretty sure, similar to myself being the CFO, you're very interested when it comes to the financial position of AT & S. Well, what you can see here is that in line with our large CapEx projects, as you know already, and as they have been presented again by Mr. Gerstenmayer today. We see a depletion in cash, which is clearly allocated and deployed for those CapEx programs. And on the other hand, we have been very successful, increased our unused credit lines in order to secure funding forward-looking. So overall, we have a solid financial structure with roughly EUR 1.5 billion cash and cash equivalents, including unused credit lines in order to support further growth programs. Turning page. In addition to what I've just said, as you do know, because we present that slide every quarter. There is EUR 660 million number or debt instruments, which have reached a maturity less than a year. The cash and cash equivalents plus unused credit lines will very nicely -- are prepared to fulfill or to refinance the debt instruments, which will reach the maturity within the next 12 months. Additionally, we not only diversify when it comes to customers and regions. We have also very nicely managed to diversify our financing sources. Maybe you have read in the press that we have also secured from the investment bank funds. Additionally, also on governmental organizations, we get still very nice margins offered. In total, our current financing cost is in the range of roughly 3%, 3.2% to be precise. Turning the page to the balance sheet. I don't think that a lot of it will be -- will come as a surprise to you. We have with the large CapEx programs and therefore, the assets in large, our balance sheet amount to EUR 4.162 billion, which is an increase of 11% and additionally slightly decreased our equity. The equity was decreased Q2 on one side, nice net income in the amount of EUR 137 million, offset by translation adjustments coming out of OCI plus of course, the repayment of the old hybrid bonds and our dividend payments of the last year in the amount of EUR 35 million. So in total, equity got slightly decreased. Total assets got enlarged hence, the equity ratio is now slightly below 30%, which is also anticipated and not unusual in times of strong CapEx programs and a weakening of the market. Our net debt EBITDA ratio has reached 2.0x, which is on the back of the decrease in cash and cash equivalents, as I have already stated 2 slides before. And yes, sorry, which I stated to slides before. Turning to page on the cash flow. We see a lower cash flow from operating activities compared to prior year. This is mainly due to customer prepayments. Customer prepayments were planned accordingly way before. So this is on the back of higher EBITDA operating activities, the delta comes from the -- mainly from the prepayment. The cash flow from investing activities is driven by higher CapEx. I think we have already spoken about that in length. Cash flow from financing activities, please keep in mind that compared to the prior year, the prior year has the hybrid included. So in total, AT & S has reached an operating free cash flow of minus EUR 520 million, which is in line with the projection we have had when doing the announcement earlier this year. Turning the page. As you might have read from last week's announcement, the Executive Board will provide the consent of the Supervisory Board propose EUR 0.40 per share to the Annual General Meeting on July 6, 2023. The dividend payout ratio equals to 13% and in total, it's a little less than EUR 16 million. Given the continuously challenging market environment, but at the same time, the confidence the Board and the AT & S team has in our growth strategy, we foresee this as a good contribution and also an indication on the further outlook of AT & S. Bringing me to the guidance of the current year, which has started on 1st of April 2023, we foresee -- the Board foresees a revenue in the range of EUR 1.7 billion to EUR 1.9 billion and the profitability of adjusted EBITDA margin between 25% and 29%. Start-up costs in relation to Kulim and Leoben are projected to reach roughly EUR 100 million. Our investment net CapEx is in the range of EUR 1.1 billion. One comment I would like to make, however, that on the back of our depreciation, please keep in mind that the Chongqing III depreciation or the assets are now up for depreciation even though that the loading might be still lower. On the midterm guidance, Mr. Gerstenmayer has said it on his first slide, he will happily confirm the midterm guidance, which we have announced earlier this year by moving it to 2026, 2027, but confirming our ratios as stated. This is it from my side. Thank you very much. We now are happy to take your questions.

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 yourselves to 2 questions. Once we are through and there are still questions and time, we will start another round. Now I would like to hand over to Ulrica to handle the session.

[Operator Instructions] And the first question comes from Jurgen Wagner, Stifel.

Yes, you talked about price pressure. Where are you seeing it? And how are your LTAs or how sticky are your LTAs? And the second question is on your contract liabilities that are now quite high compared to your sales level. How high can they get? And how will the reversal of these liabilities look like in '24, '25?

Jürgen, LTA stands for?

Long-term agreements, sorry in substrates.

Okay. Let's start with the price pressure. I think in times like this where we have seen a U-turn in the market from shortage in capacity down to overcapacity, I think it's a natural development that price pressure kicks in, especially in a market that is as competitive as the electronics market is. Sure, we see significant price pressure in the substrate business, but we see also quite some price pressure in the PCB business. I think it's true for both business segments. I think, mainly driven by available capacity on the production side. The second question was about our long-term agreements. I think there is no real big change in the long-term agreements like we have agreed them with our customers. As I said before, the only change is that we pushed out the one capacity investment in Kulim. Definitely, this is a change in the agreement with the customer. But the rest, I think we are executing according to the plans and the agreements.

And the contract liabilities, how high can they go? And how will they reverse or when?

What we have already announced is that this will reach half of the prepayments level.

Now going on to the next question here. That is Alexander Thiel, Jefferies.

First, from my side is on your visibility. Your Q4 run rate implies a very strong uptake in the second half to reach a very ambitious full year guidance of EUR 1.8 billion on the midpoint was 27%, which is already the low end of your midterm guidance and with price pressure on top. I'm just wondering if you could talk about your confidence to achieve this level again, what you're hearing right now from your big customers that makes you so confident that we're going to see this uptake in the second half.

Yes, I think this is a very good question because visibility is not the best one. But nevertheless, what we see is that the inventory levels are coming down month by month. We see also an uptake in demand for new products. We see the pipelines for new products are nicely filled, which is to be expected that also new products are kicking in. I think this, in combination with the forecast we received from our customers with the caveat that these are not always binding forecasts. But nevertheless, it's an indication we receive. We have a certain confidence level that this is challenging but achievable target.

Let me add to the bottom line. And what we do see is mirrored curve in general from 2021 to 2022. So we will start lower and then see higher top line and also higher EBITDA margin. But what we have already said, all these efficiency gains and cost optimization will kick in or are already because we do have visibility of the first 1.5 months of this fiscal year already. So we are quite pleased with the outcome. So we are quite confident that we can achieve the guidance we have just given.

Okay. My second one is basically, will you provide us a historical comparison for the new reporting structure? And a follow-up to the first question from my colleague is on the contract or on the customer prepayments that we have seen, right? So on the balance sheet, it says roughly EUR 600 million what you received I think previously, you guided us for roughly EUR 850 million to EUR 900 million. So you expect now that another EUR 200 million is coming this year. That's how we should read it?

Okay. This is a very diverse question. So firstly, yes, we will provide the comparison. And secondly, it's -- I think it's fair to say that we will approximately reach by the end of this fiscal year the total amount we have already stated a couple of quarters ago. I'm just looking at Philipp, how long this was back or how long this is expected. So the number which you have already received, we very likely we'll see by the end of the year.

The next question comes from Patrick Steiner, Kepler Cheuvreux.

I'll try to go with the first 2 questions on EPF substrate service business. Can you give us an overview of your service substrates business at the moment? I mean your large customers' latest chip seems to have quite a low acceptance rate and the actual sales numbers they target rather negligible, I would say. Are you still mostly producing the predecessor generation or what's the situation here? And do you expect the situation to get much better with the next-generation chip, which is expected to be launched at the end of this year? Or is this too early?

So now you're asking very tricky questions because we typically cannot talk too much detail about customer and also customer developments. Let's take or let continue what I have said before. What we see and not relating to one specific customer because server business is not only related to one. We see quite nicely field technology and product pipeline. Whether the one or the other shows already huge demand, we always need to consider when was the launch time of the new product. And has it already ramped or is it under ramp conditions. Basically, I would say, if you talk about server CPUs, you talk about in volume to customers. if you're engaged with them, then the likelihood, if the market takes up that you receive certain volumes is not that bad. So it's somehow communicating pipes. I think I try to circle a little bit around your question because customers specifiers is really difficult for us. I hope it gives you at least an indication.

Yes. I might squeeze a second one in about your reporting structure. I mean it seems like a really good movement to increase transparency a lot going forward. This might also indicate to me, and please correct me if I'm wrong, that you might see first revenues with the new substrate customers in the first quarter of '23, '24. If yes, could you give us some kind of growth trajectory or how you expect the business with those customers to develop over the next 1 or 2 years?

You're really asking difficult questions today. What I can tell, yes, we generate revenues with new customers already. I will not talk about how much and who it is. I think you have an estimation already. And I just wanted to add here, it's not just a reporting structure. We completely changed our operating model. So we are really running the entire company with a new setup, which was important for us also to streamline the processes and to focus the teams on the different kinds of businesses because PCB is definitely a different business than substrate, which is closely related to macro electronics. So I hope this is somehow sufficient for you. I cannot tell you more in specific.

The next question comes from Daniel Lion, Erste Group Research.

I'd like to follow up on the capacities and demand patterns that you're seeing or expecting when you're going into the second half year or maybe towards the end of the year. On the one hand, how just some -- maybe some or put it in figures. How would you expect that the new setup that you currently have, less capacity in Kulim, but now additional capacity in Leoben. What does this mean for the graph that you used to show in terms of capacity growth compared to fiscal year '19, '20. Where do you think would we be out the end of this fiscal year and maybe also a year further ahead? Are we still somewhere close to what you've shown us historically? Or has this changed a lot?

Okay. So in regards of the running fiscal year 2023, 2024, no change because it was always the plan that we started production in Kulim 2024 somewhere mid of that or second half. The same is true for Leoben. So you see no impact for the running fiscal year. And for the year after on top of my head, I think the impact will be limited. It also depends how the mix will look like and how we can manage the ramp. So we need to update these numbers, but it's a little bit far out when we talk about the year after. Probably for next time we update our capacity overview, charge again and potentially talk about that later.

Okay. And maybe related to this, also, how do you expect the sales mix to come in towards the end of the year on the one hand maybe also kind of a follow-up to Patrick's questions. But would you expect the sales mix to move towards the high-end products of your big client? And also regarding the new clients, are you getting there demand from the high-end products immediately? Or are you starting with, let's say, low-margin products first? And do you need to build your way up until you get the more profitable products? And how does this look like maybe how would you expect this to look like in the coming quarters towards the end of the year?

I would say, I can answer your question in a way that there was an underlying mix we have already always assumed with the business cases, with the communication we have done and so on. So no fundamental change is there. We also received very nice feedback from new customers where we are in qualification and they clearly state that AT & S is kind of a benchmark in terms of yield and quality performance, which qualifies us to very fast move into the high end, which is always our target. So I would say no real change to the original plans. And I think this generates then the numbers we have told you in the guidance for the running fiscal year and in the midterm guidance.

And my second would relate to the balance sheet structure. And also, you mentioned that you expect some further prepayments until the end of the year, around about EUR 250 million in addition when I understood this correctly. Would you expect some additional cash flow from subsidies or maybe also subsidized loans in the course of the year that we need to take into account when modeling the balance sheet structure?