Q1 2027 AT & S Austria Technologie & Systemtechnik AG Earnings Call
Speaker #1: Overview of the key developments with the Steen will comment on the financial figures and our guidance. As Viara mentioned, the presentation will be followed by a Q&A session, now I would like to hand over to Mr. Martin; the floor is yours.
Speaker #2: Ja, thank you very much, and ladies and gentlemen, a very warm welcome from my side. My name is Michael Merten, I'm CEO of AT & S AG, now since a little bit more than 1 year, and it's an honor now to present you for the second time: Q1 numbers, and now Q1 numbers for our new fiscal year 26-27.
Speaker #2: It's an extreme pleasure to do that with my dear and still relatively new colleague, our CFO, Gerrit Steen. And very early this morning I read one of the first articles about the positive reaction on our quarterly numbers, and the headline was: "Successful restructuring and turnaround." And ladies and gentlemen, I think this is correct and incorrect both ways.
Speaker #2: So we have a very positive first quarter, but it's just the delivery to promise. It's exactly what I promised to hopefully all of you, a year ago.
Speaker #2: It's a very consequent way of developing a company from a pure supplier into a tech and innovation partner to its customers. Of course, doing the homework on the cost side, on the supply chain side, within all of our operations, etc., but it's a transformation of the company and all of its business models as well.
Speaker #2: And this is the core reason why our profitability is going up and why our sales are going up, and why customers are so keen to work together with us.
Speaker #2: And this is, of course, strongly supported by the entire executive board and therefore also a very special thank you again to Gerrit Steen who is supporting me now since a couple of months, and so we are both driving this kind of a success.
Speaker #2: So sorry for these initial remarks, I think this was important, especially for me, because I was the person giving you the promise a year ago.
Speaker #2: So now, coming to the first slide, we had a very strong start into our new fiscal year, with a revenue of approximately 550 million euros.
Speaker #2: This is a gross of 40% constant currency, year on year. We had very clear turnaround of our earnings per share, you already saw this indication in the last quarter of the last fiscal year, but now it's a very clear turnaround from a negative earning per share from minus 1.55 euros to close to a euro 93 cents earning per share at the beginning of the typically relatively weak first quarter.
Speaker #2: But you see, this is not a weak quarter, it's a strong one, and also in profitability. Our EBITDA went up by 134%, was previous year, and we ended up with 165 million euros EBITDA, what is an EBITDA margin of a little bit more than 30%.
Speaker #2: I always told you that EBITDA is just one financial KPI, and maybe not the most important for us. We want to deliver net profitability at the end, earning per share.
Speaker #2: This is what counts. We want to provide positive cash flows on the operational side for you. And therefore, the EBIT number, what is our internal core KPI for profitability, because it's the KPI what is easiest to access, we show you an EBIT of 73 million euro, what is more than we reached in the entire last year.
Speaker #2: This is more than plus 500% versus prior year, and it's an EBIT margin of more than 13%. I'm quite proud to tell you that all of the communicated projects are on track.
Speaker #2: More than this, there are more projects which we have not communicated so far, and where I can't talk about so far under until the INGIS, as we call it, dry, so we have still a very strong market momentum, and customer diversification is still going on.
Speaker #2: We have a couple of more projects in our pipeline in the 3-digit million euro range, interestingly, with the diversification I promised to you in both, in customers and in sites.
Speaker #2: So in customers slash technologies and in sites. So more or less all of our sites worldwide will profit from these ongoing projects, and both of our business units will profit from these increases as well.
Speaker #2: Maybe you remember that we announced a very defined China for China business. This has been successfully implemented, management is in place, and we had a very, very positive head start, a better than expected, and we see that this business will also be a strong pillar for the future.
Speaker #2: We for certain political reasons, of course, we divided it internally from the remaining part of the business, so it's a pure China for China business driven by our Chinese employees.
Speaker #2: To secure our financial freedom, and of course also to secure our shared equity, we successfully placed a 400 million euro convertible hybrid bond, interesting construction but very successful.
Speaker #2: Many of you and other investors have been keen to sign on for it, so you will see later on from. That also our financial situation significantly improved, and gives us all the tailwind we need for further growth.
Speaker #2: So next slide, please. So as I said, as a technology partner, for our customers, not just supplying standard projects, it is important not just to be in one of the market segments.
Speaker #2: We are all talking a lot about the substrate area, of course what is a very strongly growing area, coming from artificial intelligence, supercomputing, and advanced computing.
Speaker #2: But nevertheless, there is a lot of things around it where we are profiting from, testing infrastructure, very high complex systems, very high complex PCBs, printed circuit boards, which are necessary to produce test equipment for all these ICs chips we have in the world.
Speaker #2: We have advanced PCBs for many of communication applications, for space applications, but also for applications with very high power demand. We have high power electrical embedded components in PCBs, for power distribution, within computer within artificial intelligence systems.
Speaker #2: To bring down the necessary currents, to handle and lower values, what is highly important. And here we are actually ramping up capacity not just here in Austria, but also in other countries.
Speaker #2: We already talked about optics. Optics definitely is key, it is already becoming key. You remember that I talked about optics from my first day on, because the 21st century is the century of the photon, and photons, optical transmission, is significantly more effective in the energy consumption on the one hand, and it's significantly faster.
Speaker #2: By a couple of orders of magnitude. So we are more and more stepping in the production of optical transceivers, and we are going into the embedding of optical structures in the future as well, co-packaged optics I will come back to this later on.
Speaker #2: And of any longer just these small 50 by 50 millimeter substrates, which we know from the past, we are talking about more and more complex systems where entire chiplet systems are on top of these substrates, have to be interconnected where we have to embed tens of components for the internal communication, for pre-computation of data, within a substrate.
Speaker #2: So this is going on as planned, with a couple of customers already, so we are not depending on one or two customers anymore. And this bunch of opportunities is driving the entire business all over the globe for us.
Speaker #2: Next one, please. Let me come back once to optics. I know that a lot of you are keen on getting a deeper insight into technology, and we promised from time to time that our CTO also will give a talk to you.
Speaker #2: Diving a little bit deeper in technology. But just to understand what we're actually doing and where we are investing into optics, you know pluggable optics, is what you have in your network.
Speaker #2: If you have a computer network at home, if you have internet at home, sometimes you already get an optical plug into your house connected to your router.
Speaker #2: And from there, you have the classical electronic distribution by cable. This is pluggable optics. Then you have optics on board. You saw these device on the last slide already.
Speaker #2: So we have optical interconnectors which can be placed directly on a board, to connect two different boards to each other for high speed communication.
Speaker #2: This is state of the art technology, and we are in it. The next step, what is actually ramping, like hell, is so-called co-packaged optics.
Speaker #2: So the next step is not to have these optical plugs to be plugged into a board, but now we embed optical transceivers into circuit boards.
Speaker #2: So we put them directly into the board, with micro plugins from fibers. This is what is actually the latest generation of technology, what we are also producing, and we are also further investing in.
Speaker #2: But there will be a next step, and this next step will change the world even more. And this is optical integrated on a board, on for chip to chip communication, for chip to memory communication, for the communication within an interposer.
Speaker #2: And also on this kind of technology, we are actually working. We are talking to about these technologies with our customers, and exactly this kind of road mapping, and also evaluating the future of technology possibilities, is what creates the strong binding and the strong relation now between our core customers, and ourselves.
Speaker #2: So I'm pretty sure that all these optical fabrics will be the future of computation, for energy saving. This is one issue. The other one is for enhanced communication, what actually is the bottleneck for advanced computation.
Speaker #2: Okay. Next one. Yeah, we are expanding and investing in almost all of our sites, actually. And so what is one of the most prominent ones, because we made announcement of it, about it is the Kulim expansion.
Speaker #2: So our expansion in Malaysia, in the north of Malaysia, and it's the Kulim campus, as we call it, 2.0. You see on the picture, and you see later on a little bit a bigger one.
Speaker #2: On the right-hand side of the left picture, there is the plant, what is already in use for AMD. And the front, you see R&D technology and some infrastructure, and the big plant on the left-hand side, this is the new plant or the shell is already existing, where we are actually what we are actually building out for a second big customer, and a couple of smaller customers.
Speaker #2: This is already financed, this is already announced. In Chongqing, in China, we also have expansions. We are maxing out the resources we have over there.
Speaker #2: So under proportionally, to existing investments, or to new investments, just by adding some equipment, we can significantly increase our capacity for existing customers with existing products that means on a relatively low risk level, with a relatively low investment level, and of course a high profitability.
Speaker #2: Especially larger gap between EBITDA and EBIT. Smaller gap, sorry, between EBITDA and EBIT. We have an enhanced technology mix here, so we produce substrates for artificial intelligence, we produce substrates for servers, and for high performance computer, and for network applications as well.
Speaker #2: And we are actually looking for more capacity for embedded optics. But also in Europe, we are expanding. You already heard about this HTB3 Hinterberg 3 plant for substrates, and also our R&D line.
Speaker #2: What is actually ramping and also here we are filling some bottlenecks to enhance capacity to the max. But more interesting maybe, is that we are also investing in the classical technologies of for high performance electrical or high power electrical components, which working like small transformers.
Speaker #2: I tried to explain it already, transformers helping us for better energy supply to high power consuming artificial intelligence processors. And these small devices are produced on the basis of printed circuit boards, with embedded components, and this is actually done here in Hinterberg.
Speaker #2: We are ramping huge production here, and we will see the effects from Q3 and Q2 and Q3 on as a contribution for our business of our business unit ES.
Speaker #2: Next one. Maybe for those of you which have not seen this picture so far, this is a real picture from our campus in Malaysia, to get a better impression.
Speaker #2: I already tried to explain Kulim 1. This is dedicated to AMD, where we are actually ramping to the max. Kulim 2, what is dedicated mostly for one other big customer, but also for additional ones.
Speaker #2: Where we made the announcement for the financing, where we are already leveraging on the profitability. And we announced on the left-hand side, you can see the core building, where the piling is already done, and some basement is already done.
Speaker #2: Actually, we are using it as a car park. But on this plot, we will build the so-called core building. Core building means a core is the inner part of a substrate, with different functionalities, lot of drillings, embeddings internally.
Speaker #2: So this will be the most modern core building for us, what is necessary for the next and overnext generation of substrate, substrates, being produced here in Kulim.
Speaker #2: Then we have where you see these blue containers, available space. So if necessary, we can build a third plant here, so Kulim 3, for additional customers in the upcoming future, as I said, we are actually negotiating some more contracts.
Speaker #2: And because we are running out of space, we already bought a plot on the right-hand side, where you see this available space on the outer right edge.
Speaker #2: There we start to move the entire car park, and have an additional space for the future. You see we are quite well prepared now for the ramp, what we are actually doing, and where our prognosis is based on for this year and the outlook a little bit for the next fiscal year.
Speaker #2: But there is more to come, and we are already prepared for that. So to now have the overlay to the financials, I will hand over to Gerrit Steen, who will show you a little bit or rationalize to you a little bit the financial outlook by time, and by the capacity built within our expansions.
Speaker #2: Gerrit.
Speaker #1: Yeah, thank you, Michael. And as well from my side, a warm good morning and good afternoon to everybody on the call. Yeah, before turning to the quarterly results in detail, exactly as Michael just laid out, let's briefly look at the economics of our expansion project.
Speaker #1: I think the bottom line of that slide is that this expansion follows a clearly defined financial profile. Capacity additions are supported, as you know, by long-term customer commitments, providing to AT&S visibility and allowing us to invest in a disciplined manner.
Speaker #1: Combining the significant CapEx and growth with cash flow generation. So looking at the slide, in detail, customer payments support funding during the construction phase, while already contributing to earnings.
Speaker #1: So therefore you see earnings impact already in this fiscal year. As production ramps, product revenues become the primary earnings driver, and free cash flow generating accordingly.
Speaker #1: So timing across our three announced bigger expansion projects is as well nicely staggered. So Chongqing with a quicker ramp through targeted de-bottlenecking, followed by the Kulim 1 expansion, where we add an additional line in existing structures, and then finally Kulim 2 with a core building, which includes a complete build out of the existing shell and the new core building.
Speaker #1: So therefore, that overall gives us visibility both on earnings over the next years, and as well on the free cash flow impact which will nicely give us a clear path to higher cash generation.
Speaker #1: So overall, CapEx as we announced in Chongqing and the high double digit million range, till summer 27 in Kulim, one and a half to two billion, till beginning of fiscal 28, 29.
Speaker #1: Overall, what we see in the industry, and which broadly applies to us as well, is that CapEx to revenue is roughly one to one per annum.
Speaker #1: So that growth model, I think that's important nicely combines visibility and capital discipline, with strong earnings impact, and a nice improving free cash flow profile.
Speaker #1: Let's now move on to the next slide, and go a little bit deeper into our first quarter results and our outlook for the remainder of the fiscal year.
Speaker #1: Overall, the quarter demonstrates continued execution against our growth strategy, as Michael already laid out. We delivered another quarter of strong operational execution. And that execution, I think, is very important reflected both in our financial performance, and as well the increasing strength of our balance sheet, as you will see later.
Speaker #1: Revenue plus 40% in constant currency, EBITDA above 30%. D&A came in at slightly above 90 million, small acceleration to Q4, in line with our expectations.
Speaker #1: Interest result at 32, slightly elevated in the quarter due to some FX revaluation of foreign currency intercompany loans. Net income, therefore at 40.8 million, is significant acceleration as well quarter over quarter, and translating into 93 cents EPS, more important though, I think, is the overall operational driver, and how they developed overall in the quarter.
Speaker #1: Higher utilization remained the largest contributor, supported by pricing improvement and a favorable product mix. Overall, I think that's very important as well at this point, demand remains very strong, customer schedules remain unchanged, and our confidence continues to be supported by long-term customer commitments.
Speaker #1: Taken together, the quarter confirms that both growth and profitability continue to develop according to plan. And we actually expect Q2 to further accelerate with both growth and margin nicely being within our full year guidance range.
Speaker #1: Both business units contributed, also the dynamics differed. So let's have a look at them now. Electronic Solutions showed a quarter over quarter improvement, with good volume and mixed growth.
Speaker #1: We saw as well higher loading in our China sites, especially, which bodes well for revenue in Q2. But as you will see later had as well an effect on our inventory levels.
Speaker #1: Our cost measures continue to show results, which is very nice. Slightly offset in the quarter by some FX effects due to the strengthening of the Chinese yuan.
Speaker #1: But as expected, still an overall slower start to the year, not yet 100% in line with our full year expectations, but as I pointed out in our last quarter call, there's a time delay in passing on cost increases to our customers.
Speaker #1: So the quarter reflects these temporary pricing effects, as expected. In addition, we continued investing in the readiness, especially of our Austrian operations ahead of future growth.
Speaker #1: Michael gave you some more details on that. So nothing to worry about. Both factors are expected to unwind progressively, supporting stronger revenue growth and profitability over the coming quarters.
Speaker #1: Moving on to ME, microelectronics continues to scale exactly as planned. Revenue increased by a very strong 93%, and EBITDA margin improved to more than 42%.
Speaker #1: I think the performance reflects successful ramps, both in Kulim and Leoben. And increased utilization across our sites, with a particular strong performance in Chongqing.
Speaker #1: Strong customer demand, improving pricing, especially as of June, and a favorable product mix. Recently signed customer agreements, also started providing first tailwind in the quarter.
Speaker #1: With accelerating earnings contribution expected over the coming months. And as in every quarter, the results include contributing from existing contractual agreements, and other recurring items that are part of our novel business model.
Speaker #1: With a significant growth in the industry, supply chain conditions remain dynamic, and require continued close attention. While this created some constraints during the quarter, we successfully managed the situation, and expect doing so going forward.
Speaker #1: Our focus is not only on securing sufficient volumes, but also on managing lead times and ensuring reliable deliveries. Our teams really remain closely engaged with our suppliers to secure the availability of key materials, as well as the equipment required for our continued production ramps and expansion programs.
Speaker #1: Combined with a strong demand visibility, we continue to see from our customers this gives us confidence for the remainder of the year. Moving on to our balance sheet.
Speaker #1: During the quarter, we successfully completed our 400 million convertible hybrid bond. The transaction was met with strong investor demand, resulting in attractive terms, and under scoring our strong excess to the capital markets.
Speaker #1: Together with our existing liquidity, this further strengthened our financial positions, cash now exceeded 1.1 1.2 billion, and net debt declined to 954. We have very pleased with the pace of deleveraging, as you see.
Speaker #1: Q1 leverage improved to below two times, demonstrating the strong operational performance and the disciplined financial management, including certainly the new finance arm. So this balance sheet increasingly provides a financial flexibility required for the next phase of expansion, while maintaining disciplined capital allocation.
Speaker #1: Flipping over to cash and cash generation, positive operating cash flow, you know, certainly is for us a very key indicator. Our overall operating cash flow mainly reflected higher working capital, as revenue increased in the quarter and inventories were deliberately built to support the production ramps.
Speaker #1: And higher loading and increased supply chain resilience. The rather lower capex number in the quarter reflects a phasing of our investment programs, therefore we expect both capex as well as operating cash flow to increase over the coming quarters, with operating free cash flow remaining clearly positive.
Speaker #1: Our 29%, reflecting both our improved financial position and the current capital structure, both hybrid instruments including. With brings me to our guidance. Based on our first quarter performance and current customer visibility, there's no change in our assessment of the business.
Speaker #1: We fully confirm our recently upgraded guidance for revenue growth of 45 to 55%, profitability of 32 to 37% EBITDA margin, capex of 1 to 1.2 billion, and leverage clearly below three.
Speaker #1: Q1 leverage, as you saw, gives us confidence that it should continue to improve in the coming quarters. And as mentioned, Q2 growth and margin are already to be expected fully in line with the guidance ranges.
Speaker #1: So let me conclude with three key messages. Firstly, the first quarter demonstrates continued execution, across all dimensions of our strategy. Second, our confidence remains firmly supported by long-term customer commitments, providing a good degree of visibility, as we continue our expansion.
Speaker #1: Third, we continue to execute this growth with disciplined capital allocation, a strengthening balance sheet, and a clear path towards stronger cash generation. Taken together, there's no change to our assessment of the business.
Speaker #1: Demand remains strong, customer commitments remain unchanged, execution continues according to plan. So thank you very much for your attention. Michael and I are now happy to take your questions.
Speaker #2: No, thank you, Mr. Martin. Thank you, and Mr. Steen. We will now start the Q&A. In order to give everyone the opportunity to raise questions, we would like to ask you to limit yourself to two questions.
Speaker #2: Once we are through, if there's still questions and still time, we will start another round. I would like to hand over to Vayara to handle the session.
Speaker #3: Thank you very much. Ladies and gentlemen, if you have joined by telephone and would like to ask a question, please press star nine, and the pound key on your telephone keypad.
Speaker #3: If you would like to withdraw your question, press star three and the pound key. If you're connected online and listening via the web interface, please click the telephone handset button and then the raised hand icon.
Speaker #3: This will allow you to ask your question verbally as well. You can also send written questions. Please use the ask a question button. So let's start.
Speaker #3: We have our first question is from Mr. George Brown from DB. I'm sorry. Let's start with the first one. It is actually Mr. Martin Marendon from Auto BHS.
Speaker #3: Mr. Martin, you're the line is open.
Speaker #4: Thanks for taking my question. My first one is on the sales guidance. Looking at the growth guidance today, how should we think about what is included and what is not?
Speaker #4: You know, I'm trying to understand how conservative the guidance is, notably in terms of pricing and new customer potential new customer agreements. And I have a follow-up.
Speaker #1: Guidance includes everything what we actually know on what will have an impact on this fiscal year. If there would be some contracts on short notice, which have an impact on this fiscal year, maybe that could be it could be an add-on.
Speaker #1: But in principle, we added the contracts which will have a contribution for this fiscal year. The positive thing is, if you are talking about additional contracts, it will have a positive additional contribution for the upcoming time.
Speaker #1: For the next and the overnext fiscal year. So it will be the grant for the continuous growth, as we see it today. So our growth will not end by the end of this fiscal year.
Speaker #1: This is the core of the message.
Speaker #4: Okay, and on pricing, you know, how much of pricing is in the guidance today? And do you think there would be an evolution, through the year?
Speaker #1: Yeah, this Garrett. So first of all, I think if you look back at our original guidance for this fiscal year, I think we indicated at that time that that mainly one third of that, and that would be, you know, basically around, you know, 10% or so, would be more pricing related and the rest is volume.
Speaker #1: And now the upgraded guidance certainly mostly related to, you know, the new customer agreements and additional volumes. So therefore, you know, that is something where we are looking at long-term partnerships with our customers.
Speaker #1: And, you know, we are very much looking at our cost base and, you know, what we need to pass on to our customers based on the cost inflation we are seeing.
Speaker #1: And that's what we have worked through and what we are still working on, on a couple of instances. And therefore, that's what we are having included at this point in our guidance.
Speaker #1: If there will be some further inflationary pressures on top of what we are seeing right now during this fiscal year, we need to certainly assess this and then determine how much we need to pass it on to our customers.
Speaker #1: But that's certainly not included at this point.
Speaker #4: Okay, very clear. And my second question is on the customer payments. I mean, you know, could you give a bit more color on how discussion and the structure of the deals related to adding more capacity have changed with customers?
Speaker #4: And if you could give a bit more color also on how much of prepayments are non-refundable capacity reservation fees. Thank you.
Speaker #1: So the important thing is, when I started my job as a new CEO, I visited almost all important customers. And I told them, we are a tech company.
Speaker #1: I invite you to visit us to create joint roadmaps, have a look into our R&D, and let's cooperate on technology. On the other hand, I asked all the customers, look, we have a relatively low ratio of shared equity.
Speaker #1: If you want to do things together, I do not accept negative cash flows in our business cases. Not now and not tomorrow. And this is the basis of these financing models.
Speaker #1: It is a mixture of a kind of prepayment and addition to the investments. And this mixture can deviate a little bit from left to right.
Speaker #1: But the positive thing is, and you've seen it from the first slides of Garrett, that our business cases are constructed in a way that we are not diluting profitability after we get these payments.
Speaker #1: We get payments over time. This is one point. The other point is, we also have pricing agreements and in this combination, we get a very stable business case with increasing cash flow over time.
Speaker #1: So the margins later on are not significantly diluted or not diluted at all by this construction of financing or grants we get. This is the important part.
Speaker #1: It can't get into all the details, of course, which are confidential between our customers and us. But the important point for you is, you will not see dilutions of profitability over time coming out of these deals.
Speaker #4: Very clear. Thank you very much.
Speaker #3: And the next question is from Mr. George Brown from DB. Mr. Brown, the floor is yours.
Speaker #4: Yeah, hi guys. Thanks for taking my questions. I just have two. So just firstly on the the guide for this year, I mean, you know, I'm assuming the customer or client payment for this year is roughly 300 million euros give or take.
Speaker #4: You know, if I assume the PCB, the EBITDA level there is roughly stable year over year, you know, then even at the top end of your guide, for both sales and the EBITDA margin, that implies the underlying EBITDA margin in microelectronics is, you know, roughly 36%, you know, give or take.
Speaker #4: So I'm just wondering how conservative you're being for fiscal 27 now that the margin in the microelectronics business in Q4 around 40%, even excluding the client payments.
Speaker #4: And then I have a follow-up as well.
Speaker #1: George, thanks for your question. This is Garrett. So first of all, I think we had some as we indicated as well, some first client payment included already in Q1.
Speaker #1: So that certainly was helping the margin in Q1 on microelectronics already. And certainly, you know, if you then look at the dynamics and the outlook over the quarters, I think that certainly will be dynamic as well based on the agreements and when they realize they are milestones et cetera related to some of these agreements and so on.
Speaker #1: So therefore, you know, again, we have included and baked that into our guidance as we see it at this point in time. And therefore feel comfortable with what we have guided for this fiscal year, including these effects.
Speaker #2: And you should also take into account that our EBITDA margin for ES will be improved over time. As I tried to explain, we are actually running a huge project on more than one site for ES.
Speaker #2: And therefore, we are occupying a lot of capacities for rebuilding, for new installations et cetera. Highly interesting. With the contribution from the second half of this fiscal year on, with strong contribution in the next and over next years.
Speaker #2: So there is a growth path also for ES and ES will be a strong contributor for the EBITDA margin as well.
Speaker #4: Brilliant. Okay, that's very helpful. Just secondly, I know you can't disclose everything here, but the really helpful for modeling purposes on the client payment side, trying to quantify that to some extent.
Speaker #4: I know I said roughly 300 million. Is that the sort of ballpark figure for this year in terms of the contribution? And then that's sort of the quick follow-up to that, is that what's interesting in your earnings presentation is that you expect, again, strong customer payments in fiscal 28, which was, I guess, contrary to some people's expectations.
Speaker #4: So are the client payments at a similar level in fiscal 28 to fiscal 27, or are they coming down, or are they going up?
Speaker #4: Any sort of comment on that would be helpful.
Speaker #1: Yeah, hi. George, this is Garrett again. So again, I think when it comes to these customer agreements, certainly they have different elements. So they are, you know, differentiated into different parts of a long-term strategic agreement with these customers, which has well going beyond some specific topics.
Speaker #1: And therefore, you know, they are as well running across certainly partly, you know, the length of the overall contractual relationship. They are partly, you know, tied to, you know, the CapEx and the CapEx spending.
Speaker #1: So they are partly tied to capacity reservation. So they are very different elements with very different timing tied to them. So therefore, that's a very diverse picture.
Speaker #1: And as well, you know, differentiates a little bit customer by customer. So we have certainly different kind of agreements with the different customers where we, again, can't go go into all kind of details due to confidentiality.
Speaker #1: So therefore, you will see, you know, these impacts on these customer agreements as well into following fiscal year. Exactly. So it's not something which is just limited to this year.
Speaker #1: And even goes beyond the following fiscal year into fiscal 28, 29. So therefore, that is, you know, the financial impact. And then you will see when you look at the slide we shown, certainly then now over time and especially now starting next year then as well, the operational business out of these customer agreements and the additional volumes we are manufacturing for them kicking in more and more starting in Chongqing and then moving over to Kulim 1 and then 28, 29 to Kulim 2.
Speaker #1: So it's different pieces and moving into different directions. But all contributing.
Speaker #2: Yeah, it includes milestone bonus payments. So it's a spread over time. And it's in hand in hand overlap with the operational performance. So therefore, we will show this financial stability of our business case over the foreseeable time for many years from now on.
Speaker #2: Yeah, this is the key behind it.
Speaker #4: Okay, brilliant. Thank you so much, guys.
Speaker #3: So much. And the next question is from Mr. George Chang from Aletheia ia Capital. The floor is yours, sir.
Speaker #4: Hi, thanks for taking my question. So since you're already named your client AMD, I'll just say that. So AMD says that they're expecting their server CPU market to grow at 50% CAGR.
Speaker #4: From something like 25 billion to 220 billion. So agentic AI is a key driver for server CPU. And in six months ago, that probably wasn't unthinkable number.
Speaker #4: And certainly, AMD didn't foresee that when you built Kulim 1 for AMD. So I was wondering from a value or volume perspective, how do you see your business evolving around server CPU and how do you prepare capacity for that beyond Kulim to obviously sort of mention sort of Kulim 3, but I'm assuming sort of the timing for these new projects.
Speaker #4: Thank you.
Speaker #1: Yeah, that's a good and important point. Most of the customers have not foreseen the demand of their, let me say, infrastructure computation to the AI centers.
Speaker #1: And this contains a lot of server computing client computing as well. And now asking for additional capacity. Fortunately, our lines, especially for AMD, are flexible enough to have a kind of a load mixing.
Speaker #1: So depending on the demand of the customer, we can produce a little bit more here and there from server, advanced server, or AI products.
Speaker #1: And historically, this was unfavorable because the prices for client and servers have been significantly lower than for AI devices. So this changed to a certain extent.
Speaker #1: So that also for us, it's not that a problem to shift capacities around a little bit. It also helps us with the material diversification.
Speaker #1: So we still, the entire market still has some constraints on the supply chain side. And for the server applications and the AI applications, you have different kind of glass material.
Speaker #1: So this is helping also to have the entire production filled to the maximum actually. Additionally, and this comes back to your original point, we said that we fill up our Chongqing facilities now to the max.
Speaker #1: And this, of course, has to do a lot with, let me say, kind of legacy product or existing products. For both for AI, but also for advanced server.
Speaker #1: So by filling up our capacities here, by now filling the last places for machines, we can fulfill some of this demand, what is actually coming up, not just from AMD, but also from other customers in that range.
Speaker #1: This is why we are maxing out everything what we actually can. And this is a relatively low risk revenue because it's more or less existing, high-end products, but it's existing, it's foreseeable yield, it's foreseeable supply chains.
Speaker #1: Foreseeable quality towards the customers and the customers are happy. And for us, it gives the grounds to relatively high margins because this one-to-one ratio of revenue to invest is a little bit more on the revenue side.
Speaker #1: If you max out an existing plant. So profitability looks a little bit better. So one of our advantages is our flexibility in technology, as I initially said.
Speaker #1: So we have the flexibility for almost all technologies which are actually demanded from the markets. We are not limited to one or the other customers.
Speaker #1: We are relatively flexible here. And we support all of the necessary technologies for today. And for the upcoming future. We are not limited here.
Speaker #1: This is one of our big advantages.
Speaker #4: Great. Just to follow up on that, so my understanding is that Kulim 1 would be pretty full by the end of next year, in terms of, let's say, capacity and my impression is that Kulim 2 is not really so much for AMD.
Speaker #4: So I would assume that, let's say, you just mentioned Kulim 3. That probably needs to be built as a greenfield project pretty soon. Is that thinking too far?
Speaker #1: It's not decided now, but it can happen, of course. So therefore, we presented or we showed this entire picture here in our presentation. Let's have a look how our ongoing negotiations with some of the other customers are going on.
Speaker #1: If we get the financing, as we get it so far, if we can continue, our more or less zero net exposure strategy so having all the financing together with our customers with positive cash flows from the early beginning on.
Speaker #1: But if this is the case, of course, there could be a position and the probability that we have to build an additional plant. This is the reason why we are preparing for it.
Speaker #1: But it's not decided yet.
Speaker #4: Thank you. Can I have a?
Speaker #1: Sure.
Speaker #4: Okay.
Speaker #1: The basic demand is there, the possibilities are there, but we have to finally negotiate. And we have to execute what we already started. So delivery to promise, my initial words, also mean that we have to execute what we already started and make it successful.
Speaker #1: It doesn't help anyone if you will struggle in the middle and if you do too much. But we will do everything what we can to fulfill our guidance and beyond.
Speaker #4: Great. Thank you. If I may have an additional question, is that I'm struggling. How do you assess the risk of your, let's say, EMIPT investment in Kulim 2?
Speaker #4: And what I mean is that obviously, we have one visible product adopting EMIPT. From 2028. But I think as you sort of, I think the previous calls have mentioned before, that there are competing technologies.
Speaker #4: Such as, let's say, COPOS, for example. So from my perspective, is that the longevity of EMIPT is a bit unknown or it might be just a bit too cautious in terms of looking at that technology.
Speaker #4: Thank you.
Speaker #1: Yeah. EMIPT is a fantastic technology, but you know that EMIPT is, at the end, a kind of a brand from Intel. And we never talked about Intel as a customer.
Speaker #1: My point is, we own all technologies which are necessary today. What also would include EMIPT if necessary. I can't tell you more.
Speaker #4: Okay, great. Thank you.
Speaker #2: Thank you very much. The next question is from Mr. Gustav Froberg from Bergenberg. Your line is open.
Speaker #4: Good afternoon, everyone. Thank you for taking my also I'll speak with two first one is a mixed question in microelectronics, please. Could you help me understand a little bit better the mix of products within that particular business segment today, let's say, how much is for sort of non-AI server, how much would you say you are selling to AI applications today, how much is for PC and other just as an example?
Speaker #4: First question, and then I'll take the other one after.
Speaker #1: One of the problems answering your question is intrinsically lying in one of my last answers. So to a certain extent, we are a little bit flexible.
Speaker #1: If it comes to actual technology and not to the next and overnext generations of technology, that we are able to switch a little bit between substrate, and advanced server, and substrate.
Speaker #1: But mostly between advanced server and substrate. So there's not a hard boundary. And we do it on customer demand and on material availability. Actually.
Speaker #1: So it's very hard to have a diversification here because really, it's changing month by month. But the most.
Speaker #4: Okay, no problem.
Speaker #1: The most will be substrate. Definitely. Yeah.
Speaker #3: Yeah. Exactly. And I think substrate and there as well, mostly related to silver and advanced server product is GPU is in Kulim a newer product which we are manufacturing there, but still, especially if you think about what we are doing as well in our Chongqing site, that's only all related to advanced server.
Speaker #4: Okay, great. Thank you very much. And then a question on trade receivables. They went up quite a lot in the quarter and at the same time, it seems like you're no longer making use of trade receivables factoring.
Speaker #4: May I just ask why have you decided to taper your factoring arrangements? And is this something that you are thinking about keep starting again later in the year?
Speaker #1: No, we did not. We did not stop the factoring. So we continued. We just had, when you compare to first quarter of last year, there we restarted again.
Speaker #1: Therefore, we had a very, very strong positive impact of factoring in Q1 of last year. This year was just a continuation. And therefore, basically, the change from factoring in the cash flow statement was much smaller.
Speaker #1: And on the other side, certainly with the growth of our business, we certainly have seen an increase overall in our receivables and as well in our working capital.
Speaker #1: Not only from receivables, but as well from our inventory build related to further loading in our sites, further basically reaching max capacity in our sites, which is a good site.
Speaker #1: Therefore, more loading, which as well more work in progress a bit. And as well, certainly then as well, raw materials for increased supply chain resilience.
Speaker #3: Yeah, the disadvantage in our business is the throughput time of our products. So if we expect what we do, an even significantly stronger second quarter, we see the first working capital effects already now.
Speaker #3: This is not one-to-one in time. So some products need six and more weeks to be produced. Material has to be purchased earlier, due to all these material shortages.
Speaker #3: We have to be very careful. So we need to have some material on stock. So we see the additional growth, the further ramp of Q2 already in our working capital.
Speaker #4: Okay, super. Thank you.
Speaker #2: Much. And the next question is from Daniel Lion from Erste Group.
Speaker #5: Yeah, yeah. Yeah, hi. As I mentioned, the potential build-out of Kulim 3, to what extent is the utilization risk reflected in the customer agreements or what do you think of utilization?
Speaker #5: Obviously, maybe not in the coming two, three years, but at some point, we'll have a cyclicality back in the business. So how do you make sure can you make sure that utilization is good and you're compensated to some extent by your customers?
Speaker #1: This utilization guarantees are part of our contracts. So we don't worry about it for the foreseeable time. And margins are high enough to pay off for the equipment quite quickly.
Speaker #1: So this is part of our risk mitigation within our contracts. It's not just payments, but it's also guarantees on utilization and take-or-pay clauses. So therefore, we are fully booked for one and two.
Speaker #1: And now we have to look for further capacities for additional contracts.
Speaker #5: Okay. Okay. And then one on the optical solutions. Can you give us some maybe more flavor or insight of how this business is developing as a share or in terms of revenues?
Speaker #5: And what would you expect as a content gain from supplying optical solutions embedded in substrates or PCBs going forward? So how much of a percentage maybe or how much does this increase the value of your products?
Speaker #1: Generally speaking, these especially when it comes to co-packaged optics, these are all high-margin products now. Giving you between 5 and 10 percent additional margin.
Speaker #1: We are actually limited in capacity. We are filling up the last, let's say, white spaces, bottlenecks we have, to max out that capacity. But in principle, if we would have an additional plant now, we could more or less fill it up with co-packaged optics.
Speaker #1: If it would be standing somewhere fully equipped, and checked so the demand is huge. The global demand for co-packaged optic is significantly bigger than it can be globally delivered.
Speaker #1: And co-packaged optics will play a major role over the upcoming time. It's necessary. Electricity comes to certain limitations. You can't have higher frequencies you're limited by all these at the end wave guides.
Speaker #1: It's not any longer classical electrical conductivities. More or less, all these connections for the high-frequency communication is at the end communication through wave guides.
Speaker #1: It comes to an end. It is at an end. Since a longer time. So if you want to enhance communication speed, and the processors are already able to digest this significantly faster than the communication speed is today, so if you can enhance communication speed between memory CPU, GPU, XPU, whatever PU it is, you will significantly enhance the system performance with relatively low effort.
Speaker #1: And this is what where everybody is looking for. This is on the roadmap of almost all of our partners. And this is one of the things we are talking from morning to evening to our partners, how we can establish this technology, how we can produce more, and what are the next steps.
Speaker #1: And the next steps are just gave an indication is not just to have co-packaged optics, but to have really optics on the circuit it boards.
Speaker #1: Integrated optics. Chip-to-chip communication. This is a must for the future. Definitely. And so the intermediate way over the next years will be co-packaged optics and we could produce significantly more than we actually can.
Speaker #1: We are just capacity-limited like the world is. The world is capacity-limited here. And it's not that easy. It's not a technology everybody can do.
Speaker #1: It's just very few competitors enough. And we are expanding this technology, but it will have not an impact for this fiscal year. But it's a part of our growth strategy, of course.
Speaker #1: For next and over next year.
Speaker #5: Yeah. Very short one, last one. By when would you expect the contracts with your clients regarding prepayments be signed and do you see any risk that your CAPEX targets could need to be postponed to some extent because the agreements are in place?
Speaker #1: Within this fiscal year, so early enough to give you a very clear guidance based on securities and contracts for the next fiscal year.
Speaker #5: Okay. Perfect. Thank you very much.
Speaker #1: Yeah. So I'm sorry, but we unfortunately running out of time. We received some questions via the chat as well. We will come back to you.
Speaker #1: And we will now conclude today's conference call. Thank you for your participation and questions. If you have any further questions besides the ones from the chat, please feel free to contact our IR team, Johannes Mattner, and me anytime.
Speaker #1: Thanks again and goodbye.
Speaker #3: Ladies and gentlemen, last word from my side. I absolutely enjoyed this conversation. It was one of the best Q&As I had since a long time, for quarterly numbers.
Speaker #3: And I'm also disappointed that we do not have more time to answer more questions. But this brings us to having a more intense communication to you and maybe set up additional communication round, or discussion round.
Speaker #3: Thank you very much for listening to us. Thank you very much for your trust and confidence in AT&S.
