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

Welcome, and thank you for joining the AT&S conference call on the results for the first quarter 2024/'25. [Operator Instructions]. I would now like to turn the conference over to Mr. Philipp Gebhardt. Please go ahead.

So thank you, Alexander. Good morning or afternoon, ladies and gentlemen. Welcome to the AT&S Q1 2024-25 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. And also a warm welcome from my side or good morning, good afternoon, wherever you join us today. So let's jump into the presentation on Slide 2. What was the key developments of our first quarter. What we are still facing is a quite challenging total market environment. We continue to see high price pressure, and we expect some improvement in certain markets for the fiscal year second half. We have already communicated a couple of months ago that we intensively have speeded up our efficiency programs, where we also had to include some EBITDA adjustments now as kind of one-timers. The good message is our factories, our big projects to ramp the plants in Kulim and Leoben are very nicely on track still. For Ansan, Ms. Preining will touch on that a little bit later. The negotiations to sell the plant are well underway. And what we also nicely can confirm that is the guidance for the fiscal year '24-'25 and the midterm guidance '26-'27. This is also underpinned by having some positive outlook for the seasonal effect. Like you know, in some of our industries, we have seasonal volatility, seasonal fluctuations, and we are just in front of the peak season of some of these industries. Now jumping into the market environment we are in. In the PCB area, we have 2 parts. On the one hand side, we call it CCC, communication, consumer, computing market. You also can see here from the left-hand graph that '23 was really a challenging year by a market decline of about 14%. Expectation of the analysts -- market analysts is that we will see a kind of recovery of 8%. And midterm, there should be an average CAGR of 4%. What is the main messages behind there? Still, we have, as I said in the beginning already, seen in fiscal quarter 1, significant price pressure continuing into this fiscal year. As said, we can expect the seasonal effects. So some markets like the communications and consumer markets are now taking up for the peak season in the second and third quarter mainly. And we have a long-term outlook, which is supported by the highly pushed or highly peak AI markets that will show a positive impact for the coming period of time. On the other hand side, we have the automotive, industrial, medical and aerospace market. Here, you can see, long term, the market mainly will be driven by automotive application. This is mainly caused by electrification and digitalization in the automotive industry. But currently, we still see weak development, especially in the same in Automotive and Industrial due to market and technology uncertainty. For Automotive, we expect at least 2 quarters' time to recover. And in the Industrial business, the expectation is that it will take a little bit longer. Moving on, on Slide 4, we talk about the substrate end-market perspective. On the left-hand side, the focus topic of AT&S, the server market, you have seen or we have communicated last year already a significant, in some cases also surprising decline of around about 17%, there is 7% recovery expected in midterm, a CAGR of 8%. What was the main underlying story here. For the server market, we see a kind of architecture change from -- more from in the past, CPU-dominated business or applications to more GPU dominated applications and systems, which is driven by the underlying AI computing power requirements. Still, there is a lot of ups and downs there in the market. A lot of uncertainty and elevated inventories is visible. So we need to have -- we need to see or we need to expect certain volatility for the months and potentially 1 or 2 quarters to come. On the long run, as I said, we expect a more diversified customer base which is mainly driven by the clear trend to custom silicon. What does it mean? Custom silicon is driven by, for example, big hyperscalers that are entering now into the supply chain creating their own ecosystem, sometimes on the component level, sometimes on the full system level. And this provides for us the opportunity to diversify the customer portfolio further and grow with these new customers where we see ourselves nicely positioned already. On the right side, notebook shipment, there the recovery somehow has started. We see some uptake in the volumes and the demand which also brought some loading benefits to AT&S and the locations. It will not be the peak demand in the future, but we see a modest growth for the quarters to come. And also there, I'm sure some of you have read the media news, a lot of OEMs are now trying to push new products into the market by integrating AI capabilities into the client computing systems and devices. Value-wise, on Slide 5, you can see that yes, due to the downturn in the server market in 2023, there was definitely a significant drop in the volume of the market. We expect a slight recovery in the year 2024 by 5%. As said, still the server part is weak. On the other hand side, long term, this is the trend we always have been communicating that we see volume-driven growth kicking in again in the subsequent years. Whatever I can tell about this slide. Yes, I think this is mainly the key messages we wanted to transfer to you today. And sure once Kulim and Leoben is started, there will be additional opportunities to grow further due to additional capacities and good collaboration with customers. Moving on to Slide 6, a brief snapshot about the underlying business drivers for our printed circuit boards. Here, what we can see in the PCB area that we have a nicely developed customer portfolio. Our focus is now to intensifying and deepen the relationship with mainly existing customers as we are already covering a wide range of applications. There are new applications coming up like optical transceivers, power embedding in the AI infrastructure. But main focus is deepen and utilizing more the existing well-developed customer relationships, widening the exposure to the customers and the one or the other add new customers to our portfolio, which should show a CAGR of 6% in that area for the future. Moving on to the next slide. A slightly different picture we have in the IC substrate area where we clearly focus on continuing diversifying the customer portfolio. The applications is nicely set and we just need to utilize them because the main technologies and capabilities are there. The one or the other new technology will come and kick in, which we are preparing. But on the other hand side, as I said already, diversifying our customer base will bring more robustness to the company, but also helping us to grow the business further and utilizing our prepared capacities. A brief overview about the current situation of the 2 large projects. The Leoben are decent in production space. As I said already, well on track to start production in Q1 2025. We will very soon ship products, first samples to important customers to get qualified. All the other things are well in place. We have 320 employees on site, and we are more or less moving closer to the ready to go. Similar picture in Kulim, start of production Q1 2025 as well. We have achieved all the necessary regulatory approvals now, and we have also most of the equipment already installed and either already qualified or under qualification. First samples have been shipped out already and the labor force is round about 1,450 people. So nicely on track, and we are preparing to kick off the volume production. How do our customers see us, voice of customers. You can see here from some customers that allowed us to name them, and they are significant also for us, like testaments. We have a clear positive feedback in the PCB area, and we also see it in the market position. We are now amongst the top 10 players globally in the PCB area as a whole. And we are now for the seventh subsequent year, a #2 position in the high-end HDI sector. I think this shows also that on the one hand side, the market position, but also the reputation of the company in the PCB area is very nicely developed and customers like to collaborate with us, which is important for the future development. As I said, deepen our relationships and getting more business in. A similar situation we have created in the IC substrate business, we have seen or I have shown before, the decline of the market. If you do the math, you can see that the decline in IC substrate business in AT&S was significantly lower than the entire market decline. That also should show that our relationship with the customer, our market position is nicely developed. And once the market is recovering, we will -- or we expect to benefit from the recovery also at least on the same level. Last but not least, where are we with our cost savings and efficiency programs. The picture you know already, we are progressing well. We have now achieved round about 63% of the entire savings. We also said already that the focus with the new fiscal year has shifted more to real sustainable savings. Last year was predominantly focused on reshaping the capacities according to the reduced market environment, but now it's really base work to make more efficient processes, structures and the plants and our suppliers contribute to the saving gains that need to be achieved. So we are quite optimistic that with a given progress and the given speed we have established, we will achieve this saving potentials we have set ourselves and also what we already communicated, we extended the program also into the year '25-'26 to take care and ensure that also some of the longer-lasting projects will be safely implemented and will show contribution to improve our cost position and subsequently also our cash flow generation and profitability. So this is it more or less from my side. I will now hand over to Ms. Preining to run you through the numbers. And then later, we are available for your questions.

Thank you very much, Mr. Gerstenmayer and a warm welcome also from my side. Jumping into the figures. Q1 2024, 2025 results. Revenue, a little shy of EUR 350 million, with a corresponding EBITDA of EUR 65 million. The net profit, hence, turned to negative EUR 34 million. Important to note on that slide and on those data is that it's a heavy headwind on the EBITDA when it comes to start-up and restructuring costs in respect to garden leave. So for this particular quarter, we had to record a EUR 32 million adjustment, adjustment which will not appear forward-looking. So once the big CapEx grants are ramped, these will be no longer the case. So currently, we see higher costs, but still due to the ramp lacking the revenue, so it looks currently distorted. Nevertheless, on the bottom of the slide, you see the quarterly development. We usually, as you do know, in AT&S have weaker Q1, followed by a stronger Q2 and Q3 numbers. This is also what we expect for this year to come. On a very positive note, our EBITDA adjusted margin is on a very strong 28%. That's a testament of the restructuring or the cost efficiency program, to be better, and cost optimization program we have currently a start that pays nicely off. Over the page, how do we look on the group level, like-for-like Q1 '23-'24 to Q1 '24-'25. Building on what Mr. Gerstenmayer has already said, we currently see in the market very high price pressure. That might also remain for a couple more quarters. The new side of the business, Electronic Solutions, here, we have managed to compensate to cancel out the price pressure by positive product mix and volume effect on the microelectronics side and the price pressure was canceled out by way higher volumes. So the trends that we have been able to report a very positive trend on the volume that we will go to address for our customers continues. So we see very -- we see a lot higher volume, but we also do see continuous price pressure. With no surprise, price pressure is translated into margins. However, as Mr. Gerstenmayer has already explained, the cost efficiency programs very nicely pay off 28% compared to 26% in Q1 '23-'24 on an EBITDA adjusted margin. Slide 13 to start with Electronic Solutions. We see also here the quarterly development. Q1 to Q1 year-on-year, a rather flattish development, minus 2%, as stated price pressure as it is evident in the industry, but positive mix/volume effect. On the quarterly development of Q4 '23-'24 versus Q1 '24-'25, we are burdened by the current situation in automotive and industrial environment, mainly in Europe and in Americas. The margin remains year-on-year flattish, though the high price pressure as stated already, cost efficiency programs work against it -- against the high price pressure and Q-on-Q, so Q4 versus Q1, we clearly could have benefited from a better mix. Over the page to the microelectronics business unit, the quarterly development Q4 to Q1 shows a positive picture plus 11%. And Mr. Gerstenmayer has already come to that and mentioned it. We see the server business picking up slower than expected, but it picks up compared to Q4 which was heavily burdened by more client business, we see a positive trend. Year-on-year, minus 6%, is unfortunately driven by price pressure. But again, as stated, if you do remember, the overall pressure in the substrate market is way stronger than what we still have to recall or have to report, but our high volume work against it. What we do also have to report on a positive note, we have onetime in the amount of totaling EUR 10 million, which is a combination of grants, positive and negative items. So we have grants and subsidies, but on the other side, garden leave higher start, of course, but also foreign exchange effects due to the sell-off of assets. Over the page, a very important slide for me, and I guess also from your side, the financial position of AT&S still very strong at EUR 1.12 billion cash, cash equivalents and unused credit lines. That amount is clearly designed to ramp our 2 big CapEx programs. A company like ours usually would not have such high cash and cash equivalents. So here, we will see this cash position to be depleted, but on purpose as we do ramp those 2 sites. On Page 17, the maturity of outstanding debt instruments. I think I need to explain here the developments we had recorded the transfer of equipment which led to a decrease of financial debt. To give a bit more insight, as this might come as a surprise, this equipment was initially purchased for one customer, but not yet put into operation. It was fully paid by this particular customer in the last financial year. It was contractually agreed that this equipment which has no further use for AT&S and therefore, it was recognized as financial liability. The transfer risk contractually was set to the 1st of April 2024. Hence, it happened in this quarter 1, 2024. That transfer is in general cash neutral. But it reduces, of course, both the asset as well as the liability side on the balance sheet. The contractual transfer, however, has a positive effect from gain after disposal of assets in the amount of roughly EUR 9 million. So this is something which you might have seen in our data. And I think it doesn't come naturally. So I felt I have to explain it a bit. Similarly to the report in the past and the information we have shared, we have roughly 1/3 of debt instruments on fixed interest rates and our current financing cost and average for Q1 is on 4.9%. One slide I see or I felt it's important to be added. How do we guarantee the financial stability of AT&S and it basically goes back to 3 pillars. We have, on one side, the self financing power, which will come way stronger, of course, starting next year when we are no longer burdened by high start-up cost and also high CapEx. Secondly, the middle part, a very diverse debt financing structure. You know that it's loans with guarantees from government and supranational organizations as well as promissory notes, bank loans, leasing financing. Very, very important, no covenants due to financial ratios. We have, of course, margin step-ups, which caused higher financing costs. And lastly, of course, as we are listed companies, starting with the bottom, there is always the opportunity though we have now focused on the sales side, opportunity to raise capital from the market. Currently, we are focusing or evaluating to be better that sell-side opportunity in Ansan, Korea. Over the page, slide, we are generally very proud of. Firstly, we were very proud to report single-digit working -- net working capital ratios to revenues. Now we are even more proud of that we can keep it single digits on a single-digit level. I told you already in the last 2 quarters that I still expect that it will increase again to low double-digit numbers. But for the time being, we are very proud that we have been able to keep it single-digit. One topic I want to draw your attention on that slide already. Due to the seasonally always very strong second quarter of the financial year, so the quarter we're currently in, we have built up inventories, which you will also see as -- which will also impact the lower operating cash flow on 30th of June 2024. Charting right into it and in principle, nailing it, what comes to the eye. Clearly, the data of EUR 229 million cash flow from operating activities in Q1 2023-2024 versus the current one of 14. Now here, we have to split also to give you more explanation and we have to do it in an explicit way. Firstly, the Q1 '23-'24 was impacted. We drove from the management side, a high focus on working capital optimization. The effects and the very good achievement we have reached is part of the EUR 229 million we were very proud to present in Q1 '23-'24. This is of course, the onetime and now it keeps -- it's on us to keep that level. For this particular quarter, you can see that only in the inventory part, we had to increase the stock by roughly EUR 25 million to cater for the higher second quarter of this year. So the EUR 14 million is not rest assured the run rate forward looking. We have here several impacts. The more sustainable run rate to give you an insight for Q2, what do I expect on operating cash flows for Q2 will be on steady state. So Ansan not taking -- sale of Ansan not taking into consideration of rather EUR 70 million. The other thing that strikes the eye is a lower investing cash flow. That's very clear. We had 2 very, very strong years when it comes to investments. We have also guided EUR 500 million, which is partially half of what we had before for this fiscal year. Therefore, also the cash flow is significantly lower. The rest, I think, is as a consequence of what I've already told you. The balance sheet, firstly, might also come as a surprise. I have already had jumped the gun on a couple of slides before, minus 1% in total assets that is supported or driven by the sale of that equipment I have mentioned already or due to the transfer to be very precise. We have an equity ratio, which is pretty much on the same level as per the year-end 2024. So 31st of March 2024, and we closed at 20.3%, and we have a net debt-to-EBITDA ratio of 4.7. Closing my presentation with the guidance for this year and for the midterm period. We confirm the guidance for this year on revenue side to be approx EUR 1.7 billion to EUR 1.8 billion with an adjusted EBITDA margin of 25% to 27% and adjusted startup effects as well as onetime costs for the efficiency and cost optimization program, including garden leave in the amount of EUR 88 million. As you do recall, it was EUR 80 million before. Net investments, CapEx, I have already told you EUR 500 million for this year. Mid-term guidance unchanged, EUR 3.1 billion for the year '26-'27 and then EBITDA, no longer adjusted, but EBITDA margin of 27% to 32%. The ROCE with the ramp up of production will be expected to again be above 12% and the leverage will be expected to again be below 3x the equity ratio. As I've already told you, in Q4 it's now expected to be at 20%. This all refers to the current company structure, including the plant in Ansan Korea to be part of the AT&S footprint that is true for the midterm guidance as well as for this year's guidance. And with this, I've come to an end, hence back to Philipp and then to the Q&A session.

Thank you, Mr. Gerstenmayer. Thank you, Ms. Preining. We will now start the Q&A. You know the procedure. 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 if there are still questions and still time, we will start another round. Now I would like to hand over to Alexander to handle the session.

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

Can you help us maybe -- can you build a bridge from adjusted EBITDA margin in the fourth quarter of 28% to your guided adjusted EBITDA margin of 25% to 27% for full year? And also then towards the midterm guidance of 27% to 32%. When we actually have an off-season quarter, rather bad sales mix which should everything gradually improve. So what's -- what are the reasons? Or how can this -- how would you expect this bridge to look like, just to get an understanding of what you factor in? Is it caution? Is it other effects that we need to bear in mind that will have a negative impact on profitability in the coming quarters, maybe? So this is my first one.

It was a very technical and long question. I will try to answer it in a very simple manner. If there is more detail requested, maybe we need to take it offline. In principle, what we do see and what we also read from the news, we currently face high price pressure. So this is clearly the effect that we will see in that current fiscal year. With new technologies, of course, the price pressure will then be reduced as new products come on stream. For the midterm guidance, in general, this is with the diversification we have involved and Kulim at the start partially where we are allowed to talk about the customer that we are very happy to cater for and very proud to have them on board. This diversification definitely helps to ease the price pressure. So with the price pressure rates now, the diversification later on, the start-up costs, which will be reduced or bond in principle, that all pays into a higher EBITDA margin. For the midterm guidance, we are no longer adjusted on the EBITDA margin. So that all should help. The detailed bridge, it's very difficult to show over the phone, but I hope that helps already.

Okay. I guess we really need to discuss it in detail. But I'll look at the second question, which is definitely shorter. Would you expect or how the terms regarding the step-up for your financing costs? Would this already be reduced upon a potential sale of the medical business? Or is this only related to full year figures?

I know you are being very smart to get me to a price tag because you could also calculate what we would envision. But of course, the leverage would be positively impacted by a potential sale of Ansan. And we would assume without jumping the gun that the step-up would be reduced. So the burden of the step-up on the interest rate will be reduced. Please allow me to be weak because if I tell you now to what the extent, I would disclose our expectation on the [indiscernible].

And the next question comes from Juergen Wagner from Stifel.

On the competitive price pressure that you have been highlighting, is this purely cyclical? Or do you see new entrants in the markets that you serve? And yes, you talked about the volatility in server. How is your share in server substrates currently evolving?

Okay. I'll take this first question. So price pressure mainly is coming from the 2 things. The one is the mix impact. As I said before, typically, client business is the business that shows more price pressure, more competitive situation than the server business. And as I stated, the client segment is recovering and server business still shows challenges. On the other hand side, due to the significant downturn in capacity utilization, competition is eager to get at least volume and loading, and this is the second main impacting factors. So really new entrants in the global market, we don't see. How is our server share evolving? I think, as I said before already, we did not decline so much in volumes like our -- like the market and the competition has been doing and we are extending our customer base, mainly in the area of server applications. Client computing is mainly served from 2 markets participants on the component side, while the server business has a wider range, especially when it now comes to this customized silicon.

And the next question comes from Gustav Froberg from Berenberg.

Just 2 for me. First, a follow-up on pricing. I mean you're talking about seeing a price pressure now, and thank you for explaining where that's coming from. But just with a view on your midterm targets because they were obviously said quite a while ago and haven't changed all too much. Have you factored in any continuation of pricing pressure coming from competition as you move towards that mid-term target? Or is this something where you feel will not be an impact for the midterm? And then second question, I was hoping you could help on cash flows. Can you give us an update on the timing of the repayment of your contract liabilities and what you are expecting in terms of free cash flow for the next 1 or 2 years?

Thank you very much for the very good question. I have to object a little bit. We have recently had to reduce the midterm guidance by EUR 400 million, which is a lot still in our world. So thanks for taking or mentioning that this is only slightly. So that definitely takes care of the price pressure, which we currently see. On the second part of the question, the cash flow, I have -- something we usually do not do. I have given you guidance for the next quarter. As said, at steady state, roughly EUR 70 million. However, forward looking, that will definitely improve: a, by a higher EBITDA margin; and, b, less of start-up costs and also the diversification we have already mentioned. Please accept that we cannot disclose the contract details on duration pattern and so forth because we are fortunately or unfortunately, however you want to see it, very limited -- or actually, we are not allowed to disclose any of those contracts details by -- and the drivers of our customers. So very sorry for that. We'd be happy to disclose, but we are not allowed.

[Operator Instructions]. The next question comes from Patrick Steiner from Kepler Cheuvreux.

Just one question from my side basically. I've looked at your return EBITDA margin guidance and it seemed this is unchanged since 2021 roughly, correct me if I'm wrong. And since then, we have seen other capacities, pricing pressure and so on. What's really interesting to me is the Japanese yen has performed quite poorly since then, which should actually be quite good for your Japanese competitors here, which should have an effect on pricing going forward as well. How does this affect your midterm margin guidance, I mean, compared to the guidance, which basically brought up in 2021. Was it expected and just very conservative? Or how should we think about this?

Okay. I'm not giving you the price tag on how conservative it was. But -- and it actually builds up on the question I've answered before. So we had to reduce the midterm guidance of EUR 400 million top line, but we also have, since the midterm guidance has been in niche or the margin profile has actually been issued, we have put some significant cost optimization plans at start, which will have a run rate into the midterm guidance here, obviously. So there's a lot ongoing. Indeed, it's a competitive environment, but we are ready and prepared to face that competition. And hence, yes, we see the pressure on the top line. We have to reduce it from EUR 3.5 billion to EUR 3.1 billion. But on the same side, we have also added quite some comprehensive programs to face that price pressure that is currently in the market. Whether it comes from the currently -- the capacity situation or the foreign exchange side, in the end of the day, we have to be prepared to defeat or to basically be prepared for the price pressure that comes our way.

Okay. Maybe one more question. Can you give us a bit more information on these margin grids or the step-ups you mentioned in your debt financing contracts. When would be like the mix step up or how does it work?