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

Dear ladies and gentlemen, thank you for standing by. I am Anna [ Egestrom ], your operator today. Welcome, and thank you for joining the AT&S conference call on the results for the fiscal year 2023, '24. [Operator Instructions]. I would now like to turn the conference over to Mr. Philipp Gebhardt.

Thank you, Anna. Good morning, afternoon and evening, ladies and gentlemen. Welcome to the AT&S Full Year 2023, 2024 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 updates. Afterwards, Mr. Preining will comment on the financial figures and our guidance. As Anna 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 a warm welcome from my side, wherever you're joining us this day for our annual earnings call fiscal year '23, '24. So if we move to the first slide, here, you can see the overview about the key developments of the last fiscal year. What we have really experienced was kind of a roller coaster in the market. We had quite some challenges to master after a very solid H1. The second half of the fiscal year was yes, was really a difficult one because the demand deteriorated significantly. I will come to the details later. The main impacting factors on the one hand side was a high level of inventories. Everyone can remind or remember to the cheap shortage, just a few quarters ago, I would say. Now we are in the other direction. So things have changed significantly over the last quarters. And this is what we had to deal with. Markets in mobile devices, industrial applications, but now recently, also automotive has shown significant fluctuations in terms of demand. Nevertheless, every cycle, every crisis has an end some time and we have gone through several cycles over the last couple of years already. So somehow we are experienced dealing with such situations. And we -- our experience was when we were prepared for the recovery, we could take benefit from the uptake of the market and can benefit from the turnaround that is on the demand side. So this is exactly what we are doing. We are preparing ourselves on the one hand side, also for having the necessary capacities and technologies available, continuing with our new factories in Leoben, the IC substrate R&D factory and the Kulim location and the factory we are preparing there. But we still have the view that despite we expect a certain improvement on the demand side, end of our fiscal year, there will -- the price pressure be with us for a while. This is what our market intelligence tells us, and this is why we are also pushing more intensively on our efficiency and cost optimization programs. We have communicated that a year ago that we started them and now we are putting more pressure on it to implement faster and more intense the activities. We have defined 2 phases. The first phase last year was more the volume adjustments and being ready for the lower volumes and now it's really efficiency kicks that we bring in. We have communicated end of last week that for certain reasons, we are intending to sell our plant -- our flex PCB plant in Ansan, Korea. Unfortunately, we have to announce that we will not be able to propose paying out the dividend to the AGM this year. I think this is just logic sequence of the performance we have to show. And following that, with a weaker market and the anticipated carve-out of the medical business, we need to adjust the midterm guidance. Nevertheless, I want to state here already, still AT&S is growing, growing significantly. If you take the numbers later from this training, you can clearly see that until '26, '27, we are almost doubling our revenue line and I think this is not that we are suffering significantly. We have a performance issue. We have a price pressure issue, but it's not that AT&S is not a growth story anymore. So this is what we foresee for the upcoming years and also quarters. So turning to the next slide. Let me talk a little bit about the market and explain you what happened there last year and what is our expectation for the running year. We are talking about value here in the next 2 slides. PCB market development, we have seen an 11% decline last year, '22 to '23 mainly driven by price decline 7% and 4% volume decline. What we expect for the year '24 is an uptake of the market which is on the one hand side, the positive message, 7% in volume, but still price pressure that pushes down the growth by 3%. So overall growth expected is roundabout 4%. If we move on to our substrate business. Here, you see an even more drastic drop from last year. This was mainly driven by the -- I can say, quite surprising decline in the server market starting in summertime last year. I have not seen any analysts that have that on the radar screen and we have to deal with that very sudden effect. Volume was down by 16%. Price declined 10% for the entire substrate market. But on the other hand side, what we foresee for the running year volume uptake of 15% and still a heavy price pressure by 7%, ends up an 8% growth for the year. You see a big dip of the 26% last year is kind of recovery. I would say it will be a little bit more back-loaded at the end of the fiscal year by 8%. The good message here is that the impact on AT&S was not 1:1. We could clearly outperform the market. So the impact on our pressure on the top line was not that big than it was in the market. But still, if you have that decline, price pressure is increasing, and this is what we are dealing with, with our programs. On the other hand side, we also can clearly see in the substrate business, which is definitely one of the growth driver of the company that if we continue with the forecast, we see with our outlook we have from the market and the customers until '26, '27, AT&S can become or can achieve the target of becoming a #3 player in the industry. This is well on track. And our expectation is that this is achievable. On the other hand side, and this is supporting what I just said, we continue -- we are continuously able to expand our customer portfolio. We just recently added a large U.S. technology company to the portfolio. We also have seen the entering into some other well-known operating customers in the AI sector, not the very large ones, but still good enough and large enough that it's significant for us. Unfortunately, we cannot tell you the names, but I think they are not so endless companies that are relevant, I would say, 10 to maximum 15. So the experts in the industry can assume who that could be. Turning to the next slide, substrate end markets. Now we talk about units because the long-term forecast is not available in value. It's only available in units, but still a picture we want to share. You see the decline on the server shipment last year, minus 19%. And the expectation also from the unit numbers is increase of or recovery of 8% in the running year. There's a lot of reasons underneath why things are growing or developing like they do. We also see that certain spending patterns have completely shifted from the traditional server business more to AI business. We see also that spending on the server equipment side, we are not talking processes or GPUs now, we are talking about the server equipment that has a certain limitation because these AI servers are significantly more expensive and the carriers, the cloud providers have limited budgets there, so they can just afford less amount of servers in numbers. Subsequently, the numbers of substrates of GPUs, CPUs is smaller when it merges -- when it moves more to the AI-driven focus. Still, the cloud spending is strong, but as I said, with certain limitations in numbers or units. So notebook is, traditionally after the COVID peak weak situation, we had the decline in '21, '22 by 19%, '23, again 13%, a slight recovery expected now for '24. What we see, the good message is we have seen that general inventory has somehow stabilized we see some kind of bottoming out. So the growth should be realistic, 3% this year and CAGR for the next coming years, also 3% in units. Yes. Nevertheless, we have good messages as well. I think we constantly generate the one or the other success. For us, it's, as I said already, really significant that we could onboard new customers in the area of artificial intelligence. You can now combine this new AI customer thing on the top -- the lower part with the new power electronic solutions things because across the entire technology and product portfolio of AT&S, we can somehow benefit from this strong trend. The one is the computing power, CPU, GPU, all these kind of things, like we see it also with a well-known company, AMD, we can state here. On the other hand side, we see it from the infrastructure, energy efficiency, energy supply, energy management is important in the server in the cloud, in the data center area, especially when it comes to artificial intelligence but also getting more and more interest in electric vehicle drivetrains and things like that. I think it's still a success story, how we ramp Kulim and Hinterberg. Volt, we are on track. We can, by all the turbulences of the market, clearly state that we will come on stream on time. And some other areas like optical modules, which is important for the data centers, high-speed data transfer are also entering into our technology portfolio, and we could generate nice leads there. So now it's a bit more technical in the next 2 slides, but they still want to keep that because AI is generating also more opportunities for AT&S. The experts amongst you, I think, will know that artificial intelligence or the large language models. They have different ways to operate. First of all, you need to train them for the training. Typically, chip use are used, especially for the large models. And when later when the things are operating, when they're interacting with the users, it is called inference, which is just you ask the model something, it's answering something and so on. And in that area, also CPUs are nicely used because they are more flexible and they can also support the workload there very nicely. So this is also the expectation that when it comes to artificial intelligence, not only GPUs will be the future, also CPUs will become again more and more important because they are more cost efficient. The cloud providers have more competition when it comes to their suppliers and energy efficiency and everything when it comes to operations is better. In addition, as I said, above already or in the last slide, there is a significant need for infrastructure equipment and the big thing in the AI area is on the one hand side, power consumption. On the other hand, data transfer, high-speed data transfer. All that is in our portfolio, and we can support by having or providing our technologies around embedding PCBs with integrated optical modules and so on and so on. So last but not least, there's another new trend, which is not so strong in terms of revenue so far, but we are preparing ourselves. So as I said in the beginning, we prepare for the times after the crisis. Also technologies are important there. And this is the own device, artificial intelligence, which is more about voice assistance, digital assistance, personalized recommendations, all these kind of things that would, in the future, be more localized on the devices, not so much in the cloud or the Internet anymore. The advantage is security, personal data, which are on the device and not in the cloud, response times and, and, and. This is a strong trend that is entering into the market. Let's see how that evolves, but also where we can support the market with everything what we have in our portfolio from subsets to PCBs and this is heavily supporting our future development. So turning to the next topic, selling the plant in Ansan. I think the details we have communicated, probably I will talk a little bit more about the rationale behind why we decided to sell the plant. It's mainly typically, a company also sometimes need to ask question, how is the portfolio of products and businesses composed? Where do we put our money into? What is the investment focus and what is the main growth and value driver of the company? And this is true for Korea. We did the portfolio analysis and came to the conclusion that thin flex PCB is a nice technology, but it's not in the sweet spot of AT&S because there are no synergies with anything either in R&D or in production or, or, or. So this is a very specific niche and we decided to provide this business the opportunity to grow further. We also called it at a certain point in time to find the better owner who can support by providing synergies by dedicated investment, a better opportunity for the business to grow. And for AT&S, we will have the opportunity to focus our growth on the core business that we drive forward and where our growth is mainly derived and generated from. So this is the process we initiated. We have some nonbinding proposals available. We are now entering to the binding bidding process. And over the next couple of months, we hope we can close that one as well. Last but not least from my side, as I said in the beginning already, we have initiated last year this saving program of EUR 440 million for 2 years. we have generated EUR 250 million until end of the last fiscal year. As I said in the beginning, this was also heavy focus, how can we rightsize the company according to the volumes we see in the market by also adding efficiencies. Now it's a very hard focus on real sustainable savings where we can really generate or can create a better competitiveness of the company for the future. So whatever is reentering -- whenever we are reentering a different market environment and volumes are taking up, this should not be turn -- should not turn around the cost savings like we generate them and implement them with the second phase of the program. Subsequently, we have to -- also to decide that we need to get -- we need to release around about 1,000 FTEs globally. This is a combination of SG&A functions and operations people mainly focusing on the white collar side more because the first phase was more on the blue color side. Nevertheless, Kulim and Leoben, as I said at the beginning, are not included in that they have a clear focus to ramp on time for sure, with the right quality and technology. They need to focus on a very efficient ramp, so spending less by still meeting the targets and the schedules. Yes. This is what I wanted to summarize. I think it was not really a very successful year, but I also want to clearly state here, our team did a great job navigating through that, lots of ups and downs, and we could clearly see that the AT&S team is very experienced in managing such turbulent times. So that can also make you confident that we will be implementing the next phases of our measures and activities quite successfully. And as I stated in the beginning, every cycle, every crisis has an end. It's visible already. The question is how fast recovery will be, but we are prepared, and we will get back on track again. I hand over now to Ms. Preining. She will run you through the numbers. This is also not so nice today, but I think the future is better.

Thank you, Mr. Gerstenmayer, a very warm welcome on from my side for the full year earnings call today. Well, where did we start? Where did we come from? Last year, '22 '23 was the best year of AT&S yet. Hence, the decline in revenue is clearly below our expectations. However, the trend of the year '23, '24 was clearly jeopardized by headwind topics like price pressure, server inventories, inflation interest plus a very much planned, so higher start-up costs due to our big CapEx program. In numbers, we have been able to close the year with EUR 1.55 billion which is below 30% -- 13% of the previous year. The picture on the revenue side is very much mixed. Mr. Gerstenmayer has shown in the market slides earlier, how the market has developed in the PCB and the substrate area. While we -- in Electronics Solutions, you do know by first of April 2023, we have changed our reporting structure into 2 BUs, Electronic Solutions and Microelectronics and for Electronic Solutions, in principal or PCB portfolio, we closed the year at 19% below the previous year. However, and I think this is very much important to mention the year '22-'23 was very successful for Electronic Solutions. So here, we are below the market trend. On the microelectronics side, however, you have seen the significant haircut the market has provided to the substrate part of the business with some roughly minus 26%, if you follow the official market trends. However, we have closed the year with minus 2, which is a clear testament to our large CapEx programs, the CapEx investments spends in Kulim and Hinterberg, on the IC side of the business. EBITDA wise, we closed the year with EUR 307 million. This is also below previous year. As stated clearly not as well supported by FX like in the year before, plus higher start-up costs and definitely under pressure due to the lower top line development. In the end of the day, that leads us to minus EUR 37 million net profit. On the lower part of the slide, you see the quarters and the development of the quarters. Clearly, on the positive note, we see plus 14% over Q4 '22-'23. However, this was a very weak quarter, but nevertheless, as the pattern is pretty much the same in the curve of the quarters. We see a clear increase in sales and more importantly, also in the EBITDA, which is a translation of the efficiency programs we have announced pretty much a year ago. Turning the page, as this is a full year earnings call, I would also very much like to compare previous year -- for the year '22/'23 to the year '23/'24. Here, you can see in numbers, minus 13%, as I have mentioned it earlier. However, the drivers are very different. In the business unit, Electronic Solutions, we had to face a very unfavorable mix and volume plus price pressure, while in the business unit and ES, as I have stated already, we have a very positive product mix and volume development, however jeopardized by high price pressure. Now if you go back to the earlier slide of Mr. Gerstenmayer, where we have stated a minus 26%, keeping it flat, plus having also faced a huge price increases, you can see that the quantity increase must be significant. And again, this is also what we see, where we see the beauty of the business and the investments in Kulim and Hinterberg. What is also very important to mention on the EBITDA adjusted margin, we pretty much kept it flat from the year before. even though a large part of the decrease is based on price pressure, which usually goes directly into the EBITDA. So you can imagine that the cost-saving programs really nicely paid off. And therefore, we were able to keep, let's say, flattish EBITDA margin year-over-year. Turning the page. Now looking at the business units. Electronic Solutions on the quarterly development. We see a flat development Q4 '22/'23 to Q4 '23/'24. However, also here, a nice increase in margins. As stated earlier, on the full year, we've seen minus 19%, which is below the market trend on PCB. But as also mentioned, we had a very positive year '22/'23 in Electronic Solutions. So we start from a different pace. Turning the page on microelectronics. Clearly, the most important number on that page is plus 46% quarter-over-quarter plus the fact that revenue-wise, on a full year, we closed only with minus 2% in a very harsh pricing environment. That gives a lot of positive spirit to the team as the quantity increase, as stated, has been significantly. On our financial position, like we show regularly at the investor call is -- here, you can clearly see that we not only deal and use our resources when it comes to assets, manpower, but also more so on the financial side, very, very diligently. So we still are able to show EUR 1.258 billion cash and cash equivalents and unused credit lines by 31st of March 2024 which is still a very solid cushion for the years or for the quarters to come. Turning the page on the maturity side. The picture you already are aware of. We have currently roughly 36% debt instruments at fixed interest rates. We monitor it very carefully in a degressive interest curve situation. So we have a very close handle on the development on that side. while currently, our financing costs are a little shy of 5%, which is in the current market environment, I would think is still a good situation for AT&S. Turning the page. One slide, I'm personally very, very proud of. The quarters, the earlier quarters now are no longer shown, but we started like 22% net working capital and brought it down to single digits, currently 9.3% showing that we also, as stated, on the cash side of the balance sheet and the working capital side of the balance sheet, we very diligently used the resources available. 9.3%, still single digit is very low. It's supported by the current market situation. That's also clear. But looking forward, this is clearly something we would like to maintain. However, personally, I don't think we can stick to single-digit forward-looking. On the balance sheet, on the 4 KPIs we show in that slide, it does not come as a surprise to you that our asset base has increased significantly by 12%, given that we have invested heavily in Malaysia and Austria. 2 ratios, I think everybody is most interested in is the equity ratio and the leverage. Equity ratio is currently at a little above 20%. Clearly, below our own ambitious target. But in a time where we heavily invest in parallel market weakening, that's a clear mathematical logic. We have always said that the equity ratio can be below 30% for certain periods. Similarly, on the net debt, on the leverage, we closed the year with 4.6x. Below our expectations, that's very clear. But again, same reason heavy investments at par with current weakening of the market. Turning the page on the cash flow. Clearly, the highlight of that page is the strong working capital management, where we have been able to overachieve the previous year, investing activities, you're well aware that the year '22/'23 and '23/'24 were the CapEx -- the most CapEx rich, just once we had in AT&S; the years to come will be significantly below those levels and all the other KPIs fall into place due to those 2 cash flow from operating activities and investing activities. That brings me to the last 2 pages. The guidance for the current year, '24/'25, we guide a revenue of EUR 1.7 billion to EUR 1.8 billion, adjusted EBITDA margin of 25% to 27% are clearly supported also by our efficiency programs, start-up costs for Kulim and Leoben in the amount of EUR 80 million and net CapEx spend of EUR 500 million, which includes, of course, our large CapEx programs, but also maintenance CapEx for the existing plants. Over the page on the midterm guidance, which has been adjusted last week, Friday's ad hoc. The revenue now is guided to be at EUR 3.1 billion, EBITDA margin no longer adjusted, but EBITDA margin, as you do know, 27% to 32% and the ROCE above 12% after steady state and ramp-up of production. The net debt to EBITDA, so the leverage below 3% as initially or as also always stated, it can be temporarily be above and an equity ratio of 20%. Now on the last point, we have already received a lot of questions. Firstly, both guidance is the one for '24/'25 as well as the one for '26/'27 refers to current company structure, so does not include any portfolio decision. On the midterm guidance, equity ratio of 20%, this is a testament of the fact that we will repay the hybrid in the year '26, '27, hybrid as you know is the amount of EUR 350 million. With this, I have come to an end on my part. And I would now hand back to receive questions.

Yes. 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 Anna to handle the session.

[Operator Instructions]. The first question comes from Daniel Lion of Erste Group.

I would like to focus a little bit on the IC substrate demand side. When talking to our major clients or reading the statements of your major clients, there is a bit more pushy, they maybe always been regarding the rebound of the market. So they're actually positive to see second quarter, so not towards the end of the year, but the third quarter already. So your second quarter -- your first quarter to see a rebound and then actually moving into '25, AMD is actually even more bullish having like a strong pipeline with its MI300 accelerators. So is it a cautious statement from you that you would expect the rebound starting towards the end of the year? Or is it like still lacking visibility that the clients really don't tell you exactly when they will need what? Because obviously, at a certain point in time, is all the new nodes that are introduced and all the new products that are being introduced to the market should find a certain demand as well. And so a little bit more color maybe of what you expect in terms of sequential development and rebound potential towards the year-end -- fiscal year end?

Okay. Thank you very much for your question. So how do we compose our predictions. It's twofold from the market point of view. First of all, we combine the analyst reports and the forecast we received from the customers. And secondly, we also need to keep in mind that some of the big customers will be served out of Kulim, which will come on stream end of the calendar year. So impacting revenue is quite limited from Kulim. This, you can -- this is the reason why you cannot one-to-one combine the forecast of the customers with our revenue predictions. And on the other hand side, as I said in the beginning, we can only refer to the numbers we have available from customers and analysts, and that is painting the picture we have currently and what we have communicated.

Okay. And on the PCP side, how do you see shape out there? Because when we see that dynamics also reflecting to some extent in your -- on your big client there, it seems like you might be losing some of the market share that you gained last year. And of course, you have the benefit of maybe the [ high fall ] you see in the fourth quarter again, if we will see an update, which usually happens every second year. So would you expect the levels that we've seen actually last year to come back, maybe not this year, but maybe moving further along, do you see yourself actually maybe gaining content, additional content that would use the scale maybe in platforms that you already supply to? How would you see actually the situation, because it seems like there's a commoditization actually ongoing that's put pressure on price, since we don't really see the -- there's that unit growth that could catch up or compensate for this commoditization that is ongoing?

Yes. I think PCB market is a little bit different pattern than we see in the IC substrate market. We have definitely more competition there due to, as you rightly said, certain commoditization of technologies. So the big innovation is not there currently. This we have seen already last year with a significant price pressure, as I stated in the beginning already. But on the other hand side, you also need to consider that, that market has different patterns over the year. We have the seasonality. We have a share allocation topic, so typically big clients have 4, sometimes 5 suppliers. We have also experienced in the past quite different allocation of demand shares. And for sure, finally, the customer needs to be successful in the market out there. So as I said in the beginning, our expectation, and this is built in our outlook is that we most likely can keep a significant market position, maintain a significant market position, and we do not see significant declines between the years there.

Next question comes from Juergen Wagner of Stifel.

On your contract liabilities, how should we model them or when will they reverse? And then margins in your microelectronics division, what would be a normalized margin once the inventory correction is over, let's say, next year.

Both very, very good questions, questions we do receive very often. On the first one, contract liabilities, unfortunately, I have to tell you at that point, we do not talk about our contracts. What I can tell you is that level that we have been able to achieve by 31st of March. It's in line with what we have always said. Now we have received the lion's shares already, and you cannot expect increases like in the past. Unfortunately, as you can easily imagine, this is -- these are very, very nice contracts we have been able to achieve in the past, and we cannot talk about those in detail. However, I do absolutely understand your question as we reach roughly EUR 900 million in that respect. So I do reckon but please understand that we cannot disclose margins -- sorry, the contract liabilities and the depletion of the very same to the public. On the IC substrate margins, I would hand over to Mr. Gerstenmayer.

So typically, we have a midterm guidance on the entire business. So we are not breaking out substrate merchants. It's a similar challenge you have put on Ms. Preining with other question. And I know it potentially is a little bit insufficient for you, but this is not the level what we are guiding.

Maybe just to add that much we can clearly state is that in '26/'27, our large CapEx programs all linked to IC substrates are on stream and the EBITDA no longer adjusted, but EBITDA margin then is also clearly impacted by Kulim and Hinterberg.