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

Ladies and gentlemen, thank you for standing by. I'm Alexander, your operator today. Welcome, and thank you for joining the AT&S conference call on the results for the first half year of the fiscal year 2023/'24. [Operator Instructions] I would now like to turn the conference over to Mr. Philipp Gebhardt. Please go ahead.

Thank you, Alexander. Good afternoon, or morning, ladies and gentlemen. Welcome to the AT&S Q3 2023/'24 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 as well as the 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 very much, Mr. Gebhardt. A warm welcome from my side as well to our Q3 earnings call. Let us immediately jump into the first slide. What are the key developments we are looking back during Q1 to Q3. First of all, what is obvious from our numbers and also our recent ad hoc announcement is that Q3 did not really show unfavorable demand development compared to Q2, we had to consider and recognize that especially in certain market segments, the market is not in favor to us. First of all, it was over the last quarters, the outlook from the market analysts were significantly deteriorating in regards of server substrate demand. I will come to that later about the numbers. Secondly, also the mobile device business, which is in some turbulences already quite a while, also showed certain weaknesses, which ended up in a not so favorable product mix for us and also due to the available capacity and the low demand, the price pressure has also gone up over the last quarters. So this finally impacted mainly our top line. This was also the reason why we had to re-adjust our revenue outlook for the running fiscal year from the previous EUR 1.7 billion to EUR 1.9 billion, down to EUR 1.6 billion. Basically, summarizing the entire market is still quite volatile. As you can see, the changes between Q2 and Q3. There's a lot of changes ongoing every other day, visibility is limited. And as you can also see that market analysts are also struggling with interpreting the demand and the forecasts. I can also show you later a little bit the uncertainties that are there. Nevertheless, we could finally confirm our margin, our EBITDA margin guided I think this is by the negative message on the top line, the positive message on the bottom line and margin. Why are we able to do so? Details later, mainly driven by our excellent execution of the efficiency and cost reduction plans, projects, and this is heavily supporting it. As every cycle, every crisis has sometimes an end, we continue to prepare ourselves for the market recovery, which is now expected by all sources available for the second half of 2024. We still continue to prepare our plants in Kulim and Leoben, the projects are nicely on track. Probably you have seen from the media, the opening ceremony of Kulim last week, and we are continuing to prepare for the ramp end of the calendar year 2024. The other good thing and the good message is our med-term guidance is still confirmed, and we will go later to that detail as well. So moving on to the next slide. Here, you can see some details about our 2 pillars of the savings program. The one is the OpEx program, the other is the CapEx program. The OpEx program, which is a program for 2 years or 8 quarters will show an impact of EUR 440 million savings in the 2 subsequent years. As you also can see from that graph, I know it's just simplified, but visualizing the progress we have gone through the first 3 quarters, and we are completely on track with our targets. So the first 3 quarters are fully implemented and showing results, as you as can see from our bottom line margin generated and reported, so we are confident that we will continue that successful execution, and that will also help us to be prepared for a more competitive re-ramp after the business will improve again. On the CapEx part, also 2 things. The one is real savings so that we really turned around each and every project, revit each and every project to the minimum we really need to invest. Saying that, it's also important to highlight that this is not impacting any commitment to any customer, not any commitment for the future growth. It's an efficient and effective usage of CapEx allocated. And the other one is also a push out of not needed investment that we will most likely do at a later point. So some impressions about a very important milestone, which is the opening of Kulim. For us, it was really a pleasure that it was first time our big important customer showing commitment, showing presence in front of politics, our employees and media. So I think this also could show and make us confident and AT&S people, it makes proud that we have developed in collaboration with one of the big players in the semiconductor industry, another big player, and that is also committing publicly to AT&S with the reasons why AMD is interested and motivated to work with AT&S due to the performance already shown, the quality level, the technology is available and content. So this was really a very nice event and I think can also give us all confidence that we have a new strong partner on our side. Some details about the campus, what is now opened. On the picture, upper right, you see the office building. This is necessary. The lower one is the production plant, which should generate business finally. We have now the first plant opened. We invested so far in the location in the entire campus, and it's not just the factory building, there's a lot of site buildings for waste, water, whatever treatment and EUR 1 billion. At the end of 2024, when HVM starts, we have around about 2,500 employees on site, 1,500 blue collar, 900 white collar, white collar mainly composed out of engineers that drive the processes, they qualify, they take care about the quality. As said, HVM starts end of 2024. And the main product groups we will produce is IC substrates or ABF substrates for server applications, including cloud service, artificial intelligence applications and so on. And also there, if you remember back, we were able a couple of months ago to communicate that AT&S is an important supplier for the MI300 platform. So this is directly addressing the AI segment of the market. Also Leoben is progressing quite nicely. Main tools have been moved in at the end of the calendar year, when we start HVM there, it's around about 450 employees. The split in blue and white collar it's a little bit different there. Main reason is that we have also the R&D center on site. And therefore, we have more needs for white collar than for blue collar. And this is the reason why this split looks different than the one in Kulim, which is a real high-volume manufacturing site. We have achieved Phase Red, which is clean room in condition and specification. The first qualification lots have been successfully run through the first machines and equipment, which is also showing nice results. By the way, this is the same for Kulim. And also there, we see a significant faster ramp of yield than we have in the past 10 years ago seen in Chongqing. So we see clearly the learning curve we have run through in Chongqing and transferred now all of the knowhow to the move new locations. Products beside R&D activities and technology development is, again, IC substrate for smaller customers and also application, including cloud server and others, which is nicely fitting to our technology strategy. Talking a little bit about the markets that are underlying the recent numbers and the performance we have shown, starting with the PCB market, I think this slide should show familiar. It's just the update of the slide we have shown in the last quarters already. Here, you can see that in the PCB communication consumer computing market, I would say it's kind of stabilizing the situation which has shown a significant downturn before, but it's stabilizing more or less on the same levels. Expectation for the future is there will be recovery in the average growth rate for the coming years of around about 5%. On the automotive, industrial and medical aerospace part, the deep was not that big in 2022 and more or less a stable development in 2023 as well. Moving on to next slide. This is just one level deeper deep dive into smartphone market globally, and it's now really smartphone, it's not PCB, worth to mention. Here you can see comparing a quarter 4 '21, where we have been in the midst of the COVID crisis against Q4 '23. We see a 12% decline which is already an indication about usage of capacities available in the market. And also, if we compare Q1 2022 against Q1 2024 expectation or forecast, again, 9% down. Also there, it's worth to mention that still 2022 was COVID time and now what we see is traditional seasonality is back, which shows the impact in Q1, Q2 calendar quarter traditionally. And now all these special effects are gone, and we need to prepare ourselves for a more intense seasonality for the future. But this is what we have always experienced for the last 20 years. So it's coming back, and we know how to handle that. Moving on to next slide. We talked about the substrate market. Here, you can see what I mentioned before, some uncertainty between different market analysts. First of all, let's start the development in 2022 for server shipment, server substrates. It was a 16% decline. Expectation for '24 is between 7% to 17% rebound. So it depends which or whom of the analysts, you asked from there, they have a common understanding that the growth for the next 3 years can be or will be around 8%. On the right-hand side, you see the notebook market, which showed already the impact in '21 with a 19% decline, another decline in '22, 13% and somehow stabilizing on that lower level now, which is not so far away from the 2019 numbers. In the future, there will be around about 4% or is expected to be around about 4% recovery in growth. But for AT&S, it means we're anyhow focusing on the left-hand side, which is the more important market segment for us in the future. This was all unit numbers. It's important to mention that because on the next slide, we talk about the value, and this shows significant better picture. This is now the average market. We do not have available differentiated market numbers in value for server and client markets. So it's the combined market value. Here, you can see the dip in value was even larger in 2023. The reason is, what I said before, exactly the downturn in the server market, which caused the decline in the value because it's overrepresented by higher value per component. We expect and the market expects a value growth to next year for 7% and in average for the next 3 years of 16%. Keeping in mind that we have shown on the previous slide, unit number growth of 8% and a value growth of 16%. So it's double. And we can clearly see what we have always been talking about the product is getting more complex. The product is getting more expensive. So the market is driven by value and not by unit number so much. This is form factors. This is layer counts. And by the way, all that trends besides the increased value, it's also more capacity consumption. So the capacity they are already available in the market and that are under preparation will be needed for this large form factor products in future. Yes, I think this was a very brief fast run through what has happened over the last, especially third quarter, what are the impacting factors, What is our market environment. And I'm now happy to hand over to Ms. Preining to run you through the numbers.

Thank you very much, Mr. Gerstenmayer and a very warm welcome also from my side. The year-to-date quarter 1 to 3 2023, 2024 results, summaries, data at a glance. The revenue, we were able to report a up to EUR 1.2 billion, which is a decrease by 19%. Please keep in mind that the previous year was heavily impacted by a very strong first half. Hence, the Delta is -- has been also reported above in the last quarters. The result of EUR 1.2 billion turns into EUR 268 million EBITDA. From the decrease, you can also see a stronger decrease in EBITDA than in revenue, which is a translation of the heavy price pressure, which we currently face in the market. Overall, that adds to EUR 7 million net profit. In the lower part of the slide, you see in the graph, still very high volatility we do have in the market, 7% year-over-year from Q3 2020 to 2023 to Q3 2023 to 2024 and a minus 14% from last quarter to this quarter we talk about. The last quarter Delta, Mr. Gerstenmayer has referred to that earlier, is also based on the seasonality we have seen in the past. Overall, the situation, as you do know, is heavily impacted by macroeconomic trends as inflation and interest -- ECP has not decreased the interest in January. We will see how that will turn out over the year. It is still expected to be reduced, however. Turning the page. Looking into the business units, Electronic Solutions, we see a revenue decline year-over-year by 22%, which equally split into weaker product mix volume and price pressure and a 7% decline from the Q2 to Q3. The later quarterly, Delta, as already said, impacted or was impacted by seasonality, which we have seen before, driven by mobile device, but as well by big macroeconomics in particular for industrial products. The margin is a result of the price pressure and the volume decline, and we have the same trends year-over-year as well as quarter-over-quarter. Quarter-over-quarter due to the seasonality, also an unfavorable volume mix effect is part of the decline. Turning to page the business unit, Microelectronics show a slightly different trend. Here, we see a positive deviation from Q3 of the previous year to this quarter 3 by plus 46%. The volume growth overcompensates the price pressure, which then on the margin also explains the decline in margin. Quarter-over-quarter, minus 23%, we see an unfavorable volume mix effect due to the still very high server inventory throughout the supply chain. This is also the effect that drives the margin down from Q2 to Q3. On the next page, we show our usual slide on cash & cash equivalents and unused credit lines and the development since March 2023. Overall, I have to say, and we have a slide on that, and you will see that on the working capital management that we very carefully deploy our resources. So also our liquidity -- to also improve our liquidity situation. And given the strong CapEx deployment, the deviation from March to December is mitigated. So we are still on a very solid financial structure with EUR 1.231 billion cash & cash equivalents and unused credit lines. The maturity of outstanding debt instruments, we have slightly changed the view because of many requests we have received. It was rather difficult to read. So we have now -- we now show the bars on fiscal year level. And hence, that might deviate slightly from what you used from the past. Similarly, to the past, we have roughly 40% of debt instruments at fixed interest rates, where we do see, however, not surprisingly a big change in the current financing cost at 4.5%. Just as a reminder, at the same time last year, we talked about 2%. We also will see a question which we regularly receive further customer prepayments. On the working capital side, and this is something I already spoke 2 slides earlier about you can clearly see the high management focus and also, therefore, the effect knowing, however, that based on the calculation method, this is inflated by the fact that we compare the current status through the last 12 months of revenue. However, the trend clearly is improving a lot of management actions are going into that. You can see that on the inventory levels, on the accounts receivables and also compensating by accounts payable status that is kept rather flattish. So we are quite proud of the achievements that have been reached over the last couple of quarters. However, roughly 8% is not the target range we will see forward-looking. On the reduced or shortened balance sheet summary, we have a rather flattish total asset structure with a decline in equity, hence, the equity ratio got burdened by a little shy of 4%, reached 24% by 31st of December 2023. And as some already communicated several quarters that we anticipate that to reach below 30% during the high CapEx deployment time. Our net debt, the leverage has reached a ratio of 4.1 thereof. Cash flow, you can see the cash flow from operating activities compared to last year is driven by a very strong working capital management. We had seen that on the slides before. On the investing activities, we run slightly behind the comparable quarter of the previous year. And in total, the CapEx amount is by roughly EUR 100 million, shy of what we have had last year. Nevertheless, the EUR 1.1 billion, which we have stated is the target for this year. The effect you have already seen on slides before, as Mr. Gerstenmayer spoke about our 2 large CapEx program. Second part last slide, our current year guidance was adjusted lately to EUR 1.6 billion from initially EUR 1.7 billion to EUR 1.9 billion. The margin grid of 25% to 29% is still the range we target and feel quite comfortable with the startup effects in Kulim and Leoben are unchanged, and so are the CapEx protection forward-looking. On the midterm guidance, Mr. Gerstenmayer has already taken it in his interest slide, the midterm guidance of EUR 3.5 billion for the year EUR 267 million as well as the profitability and other KPIs remain unchanged. With this, I have come to an end of my presentation, and we are looking forward to receiving your questions. Thank you very much.

Thank you, Mr. Gerstenmayer and 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]. The first question comes from George Brown from DB.

I have 2, if I may. So you've reiterated the medium-term guidance, but given the weaker-than-expected trends in some of your key end markets. What gives you confidence in reaching this guidance in fiscal year '21? And then secondly, do you have any update on the capital raise situation? Any details or updates on that would be great.

Okay. I take the first one. So thank you very much. What gives us confidence? I think the confidence is generated out of the running projects. We just reported that we had the opening ceremony in Kulim. There, we see good progress. We see also good communication with the customer. And our confidence level once Kulim and if Kulim skips the schedule, what is expected by us, then this is a big contribution to reaching the midterm guidance. The other one is for sure, Volt, which is a smaller one but still a contribution. So capacities are all in place interaction with customers is good. And there's also no reason that we should anticipate that markets will not get back stronger. As I said, we expect strong value-driven growth. So capacities are there, execution is good, and the markets will recover because the components are needed.

Okay. Then I'll take the second question. As you do know, on the back of the announcement of 13th of November 2023. The Executive Board is still considering increasing capital from authorized capital up to a maximum of 50%. So the situation compared to the top remains unchanged. These considerations also supported, if you like, by their talk now have added additional keen interest from potential investors of the capital market. The company is currently evaluating the various options and is holding talks as various interested parties. These discussions are, of course, conducted under our existing confidentiality agreement. And therefore, I have to ask for your understanding that we are currently unable to provide any further information. Any capital measure is still subject to approval of the Supervisory Board. And naturally, once this has happened either way, we would inform the market accordingly.

The next question comes from Patrick Steiner from Kepler Cheuvreux.

First question would be, you mentioned heavy price pressure in the market. Can you elaborate a bit further on this in terms of the magnitude of price pressure in the different end markets? I know you can't really communicate any numbers, but maybe some ranking or something like that. That would be the first one.

Yes, it's difficult to talk about the magnitude because it's quite different and different applications already. So what I can tell you is the reason for the price pressure, for sure, it's the capacity available in a market that is not utilized currently. This is normal like you always see it in a market situation like it is. But now going into elite magnitude, it's really too complex. We would need to run through all the applications of the portfolio because it's very, very different in different applications.

Okay. Second one from my side. On Page 10 in the presentation, you said basically the substrate market growth expectations in 2024, like 7% expected the market analysts. I guess your mobile devices business is likely to shrink a week in 2024. So what does that mean for group revenue growth in '24, '25 compared to '23, '24?

I would like to start with the mobile phone part. As you can see from Slide 7, this is referring to the PCB. We do not foresee a shrinkage of the PCB markets. What I explained was the number unit numbers that is forecasted for the smartphone business. This is the average smartphone market globally. So the question is what is the exposure of AT&S in this market? Is it more on the high end or in the mid or in the low end? What products are used and so on and so on. And on Slide 7, it's not units, it's a value of the PCBs. So as you know, AT&S typically positions itself on the higher end of the PCB market, which is typically also the higher end of the smartphones, the development can be different. So be careful with drawing lines between PCB directly to the smartphone market. I just wanted to explain how the entire market around us is evolving. And yes, there's different segments as well there. Coming to the substrate market, is 7%. You mean I think?

Yes, exactly. On Page 10, it says 7% growth.

Yes. This is value growth, which the expectation is that this is also coming in parallel with the recovery of the server market and higher valued products. So as I said before, today, in the last quarter, we have seen an unbalanced mix that was mainly driven by client products, which are definitely the lower-valued products and the server ones are the higher billets. So we foresee a shift in the midpoint of the mix for the next fiscal year and to come, recover also the average pricing there.

And the next question comes from Gustav Froberg from Berenberg.

Two also from my side. First is on midterm guidance again, you're talking about price pressure as you see it today. And to what extent does your midterm guidance rely on prices rising again? Any color on prices and midterm guidance would be great. And then the second question is on your leverage profile. Could you remind us about your covenants on the debt that you have and whether or not you feel comfortable with your current liquidity situation, notwithstanding any capital increase?

Okay. I'll start with the midterm guidance. As I tried to explain, for sure, there is an impact of prices on the top and bottom line. But there is still on this Slide 10, which we already referred several times today, the expectation that the value growth due to higher valued products is coming because we need it from a technical point of view. The market will need it from a technical point of view. Otherwise, the performance of the processor packages will not be realized. So our confidence level is quite high that there will be recovery, especially once the server demand kicks in again. And the new technologies are kicking in because we see already the new technologies in front of us, which we run in prototypes today. These are significant larger form factors and higher layer counts, as I said. And underlying the values of the components is higher. So with that, we did the simulation of the midterm guidance, and we do it constantly. And also there, the results show that this is still the situation that we can confirm the midterm guidance.

Well then I take the question on leverage. As the leverage has or has been above 4x, it will not come as a surprise to you that in that current situation, with this high spending on CapEx and the current market situation, the leverage will remain high over the next 2 quarters for sure. In particular, the leverage of 4.1, please keep in mind, you always calculate 4 quarters. The last quarter of the last fiscal year, we had an EBITDA of 0. Hence, one that has grown out of the system, if you like, that will slightly improve, but at the same time, we keep investing and as already stated in the previous analyst calls the last year and this year will be the highest spend on CapEx due to the growth programs we have at stake. Now we have also said and shown that we have roughly EUR 1.2 billion on cash & cash equivalent and uncredited lines. The cooperation with our financing partners is very, very strong, and we keep, of course, the liquidity to a certain amount, which is benefiting AT&S. We also do see interest from financing parties and partners to increase the position with us. So far, and I think in very few quarters, there will be also a press release on the latest statement. Overall, you do know that we have a step-up, but no hard covenants, so there is no breakup fees. And this is something I think you're already aware of because that question comes regularly. So I think that is known to the market.

And the next question comes from Daniel Lion from Erste Group.

I would like to understand a little bit more about the dynamics that you would expect sequentially when moving out of the December quarter development in the market recoveries shapes. Of course, I would assume that as you focus on the high end in both of your segments that you should do better than the average market that you showed us in your slides. But it's really, really hard to put it down into figures and to model the quarterly or sequential recovery going forward with respect to demand capacities, pricing maybe you could help us a little bit on that.

Yes. This is basically the crystal ball we all have in front of us. I tried to explain a little bit. So for the coming period of time, as we said, the recovery is expected to keep in second half of calendar year. So this basically says that the next 2 quarters, at least should not be expected to be that strong. There is also still inventory correction needed, so the visibility is our problem, as I said in the very beginning already in markets like that and even also the market analysts are struggling with that. I cannot really give a satisfactory answer on that. We need to work through the next quarters. I think this is what it is. So it's driving on site level and driving forward our efficiency programs and manage the things like they appear.

So could you have visibility on the recovery in the second half year? Is there at least a range? Or do you have any feeling if you'd be able throughout the next fiscal year to come close to your available capacities? Or do we need to see also the recovery just building up in the course of the next fiscal year in order to become stronger in the year thereafter? Or just to get a feeling of what's realistic, it's not about giving us a precise number. We all know that the market is rather lumpy at the moment. But what are you seeing?

This is what we built in our slides we have shown before. So the best we know is built in there, so if we have or if we assume that recovery start second half of the year, and we can anticipate either in units in different markets, a growth. When I take an example for server with IC substrates between 7% to 17%. Then this mainly will be created out of the second half year demands. The same is true for all the others. Finally, this is what we know best today. Will it be the same number in the next quarter? I don't know. We are constantly observing the market. There is no written guarantee that it is happening like that, but it is our best assumption we have today. And the numbers are there. I think you have at least annual numbers, also in value for the substrates. Breakdown in quarter is, for sure, we have our assumption underlying, but I think this is what the market analysts provide us.

Okay. And then the second one on your CapEx. You mentioned you have invested now EUR 1 billion in Kulim, which during the month, there should be some EUR 350 million to be still invested in order to finalize the plan, at least based on your initial investments plans and deducting that into facility. So what's left actually in Leoben then? And how do you expect this to be placed in the coming quarters.