Atotech Limited (ATC) on Q1 2021 Results - Earnings Call Transcript
Sarah Spray: Good morning, everyone, and thank you for joining Atotech's First Quarter 2021 Earnings Call. A replay of this webcast will be available on our website for 6 months. Please note that Atotech provides non-IFRS information and reconciliations between IFRS and adjusted measures are included in our presentation material, which are available on our website. I'd like to remind everyone that our comments today contain certain forward-looking statements that are inherently subject to uncertainties and risks. We caution everyone to be guided in their analysis of Atotech by referring to our 20-F filing for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.
Geoff Wild: Thank you, Sarah, and welcome on board. Good morning, everybody, and welcome to our Q1 2021 conference call. We're pleased to present strong results in our first quarter as a public company. As you will remember, Q1 2020 was the first quarter of the coronavirus pandemic, which hit China first. Therefore, as we look at our Q1 results and further into our outlook for the rest of the year, it's worth remembering that we, like many other companies, are lapping some quite weak quarters from last year. That said, the underlying demand fundamentals for our products are strong, and we continue to see not only recovery, but meaningful secular growth in our end markets. New trends such as advanced packaging and semiconductors and high-density interconnect circuit boards will continue to drive demand for our chemistry and equipment. We will continue to support and benefit from both areas with our industry-leading customer service approach in all key markets. We're also continuing to invest in and develop our related software applications, which will help to differentiate our advanced equipment offerings going forward. In Q1, we experienced a strong acceleration in the underlying organic growth for our electronics chemistry. Here, the pandemic recovery played a smaller role as the majority of the acceleration is driven by secular trends in which we participate, especially 5G and millimeter wave and where we are supplying chemistry and equipment to the component manufacturers of both the infrastructure projects as well as into advanced smartphones. We expect that going forward, in 2021, these drivers will continue to be very supportive as we see good utilization rates of our customers, strong demand for electronics equipment and Q1 sales were excellent, as Peter will review a little later. We're also seeing all-time record order levels for our advanced plating equipment following our substantial investment in new models and upgrades over the past few years. Of course, this is encouraging for our future growth as such sales usually come with the prospect of multiple years of associated chemistry sales. Our general metal finishing segment also performed very well with organic growth for our GMF chemistry, increasing 11%. We were particularly pleased with the strong recovery in our markets in Greater China. In 2021, we expect that our GMF business will continue to perform slightly above the unit growth than our end markets as we continue to leverage the many trends associated with the move towards automobile electrification. Lightweighting, advanced coating of plastic materials and the move away from hexavalent chrome materials all hold promise for growth as we continue to invest into and promote sales in these areas. Now this quarter, we've all been painfully aware that the improving pandemic trends have been offset by some well-publicized supply chain disruptions.
Peter Frauenknecht: Thank you, Geoff. Good morning, everyone. I'm very excited to go through our strong Q1 financials with you the first time as a public company. In fact, it's a pleasure to present record results this quarter as we participate in the global recovery following the challenging quarters at the beginning of 2020 and continue to outperform the market. Let's start on Slide 4.
Sarah Spray: Operator, can we please begin the questions?
Operator: And your first question comes from the line of P.J. Juvekar from Citi.
P.J. Juvekar: Yes. A lot of people are talking about chip shortages. And the chip companies are responding with some massive CapEx. And as they build out these new foundries, what does that mean for your EL chemistry and equipment business? I know equipment was up 77%. Do you believe that you need to add capacity along with the foundries as well?
Geoff Wild: P.J., thank you very much for the question. Yes, indeed. And we commented that we've only seen a slower revenue growth in Q1 because of this. As you say, new foundries are being added. This is helpful to us because the foundry capacity is generally being added at the leading edge, which drives the leading interconnect and PCB and semiconductor-related packaging technologies, which have given us good tailwinds in this quarter and will continue to for the year ahead. The equipment growth you've referred to was predominant some with expansion of capacity, but very often, it was technology additions precisely into that market to support the packaging of the semiconductors as these expansions go underway. So it's very good news for us that capacities are going to be added around the world in these areas. Because as we've discussed with more -- before with most of them running out of steam, a lot of attention is going to the packaging and our leading-edge solutions, particularly into the smartphone and packaging markets where we are seeing this as a good growth driver. Thank you for the question.
P.J. Juvekar: Great. And if I may ask 1 more question. The software company you bought, what exactly does that software company do? Is that an enabling tool for customers? Or is that a revenue generator in and of itself?
Geoff Wild: Thank you. The software company we bought with about 80 employees, many of whom are in Minsk, Belarus, is closely integrated today with generating the software to make our equipment solutions run. It was previously doing that, and we bought the company that was helping us with this. So that will continue. However, we're adding headcount and resources in order to move into other solutions like the IIoT, I mentioned, so that we can put dashboard solutions, help customers with predictive maintenance, helps them with dashboards to reduce their cost of ownership on our equipment and drive efficiencies. So we'll be expanding into those areas, which I think will significantly differentiate our leading-edge equipment. So that's the purpose of this. It maintains what we've already done on custom software for equipment, but it will expand into other related areas and services as well.
Operator: And your next question comes from the line of David Begleiter from Deutsche Bank.
Katherine Griffin: This is Katherine Griffin on for David. So first, if we could just talk about some of the strength in Electronics in Q1. Can you talk about what drove the upside there? How sustainable that growth is? How sustainable the margins are, and kind of how we should think about that in terms of expectations for Q2?
Geoff Wild: Why don't I start with the overall strength of the Electronics market, and Peter can comment on Q2 after that. So what drove it, I think, is the current strong strength sense of recovery. In 5G, for example, we're in the first year of an approximately 5-year rollout. We're seeing increasing adoption for 5G smartphones and more 5G smartphones are now being produced with millimeter wave really still to follow. So currently, we're only accounting for about 35% penetration of smartphones in 2021, which is very much in line with earlier predictions. So we're also supporting 5G base stations. We're also seeing very good growth. We previously said we grow at twice the rate in semiconductors for general printed circuit board area, and in quarter 1, we exceeded even that. And the reason is because of these high-density in connect and chip packages, which require very advanced chemistry in order to make these packages work. So these are good, strong tailwinds, which will run, I think, for several years. Peter, would you like to take up anything on that question?
Peter Frauenknecht: Yes. Maybe just a comment on margin. As you mentioned, it's -- we see a very strong margin. You see that we had an increase in margin driven by our strong growth rates, and in fact, diluted by a higher equipment business. So if you pull that out, the margin on a gross effect would be even higher. And for the second quarter, we continue to see growth rates based on the strong secular growth trends in the market and with a very strong innovative position.
Katherine Griffin: Great. And if I could just follow-up on -- could you just speak more about your expectation for raw materials and how you expect to offset that with price either for the full year. Can you just speak to any raw material availability issues you may be having? Any color would be helpful there.
Peter Frauenknecht: Yes. So first of all, just want to remind that we have a very effective contractual pass-through for precious metals like palladium, where we pass on automatically the pricing volatility to our customers. We see currently with the supply chain disruptions and shortages that price go up in many areas as well. We addressed that and also for other materials with a minimal time like are able to pass it on to our customers. And again, we're working very strongly to bring the supply chain back into a normal order. We expect some issues still to remain in the current quarter, but are confident that over time, we see some easing of the supply chain issues. Does that answer your question, Katherine?
Katherine Griffin: Yes.
Operator: And your next question comes from the line of Josh Spector from UBS.
Josh Spector: When I look at your first quarter performance and the way you're talking about second quarter, I think incremental EBITDA margins, excluding metals, they look like almost about 50%. And I guess your implied second half guide is a pretty big step down from there. So what changes first half, second half, that incremental margins change so much? Or is there some conservatism kind of in that second half margin guidance?
Peter Frauenknecht: Well, I think on -- when you look at the second quarter, we continuously see strong growth rates. We continue to see a strong conversion of sales of -- particularly of our chemistry business into margins. Please keep the mix effect in mind. Please also notice that we expect a very strong second quarter with equipment business, which naturally runs with a smaller margin.
Operator: And your next question comes from the line of Arun Viswanathan from RBC Capital Markets.
Arun Viswanathan: Congrats on the good start here. Just curious to get your thoughts. Could you describe a little bit more on some of the secular growth in 5G and cloud computing? I know that there was some pickup last year because of COVID potentially as well. Does that put you in a little bit of a tough comparison as you move forward? Or is that growth kind of above your expectations?
Geoff Wild: Yes, the growth is mostly in line with our expectations, except for the base stations, I would say, where related business hasn't picked up yet mostly because the major manufacturer you can get is changing the design to improve power consumption and new orders for the infrastructure will be rolled out in H2. But other than that, I think we are pretty pleased with the 5G rollout on smartphones. It matched our expectations. We're seeing more and more smartphones being introduced by leading smartphone companies in China, and we are a plan of record in packaging technologies for the majority of these. So we're in good shape, I think. We have seen a bit slower rollout than we might have expected on millimeter wave just because the infrastructure isn't there. But when you look at the complexity of some of these antenna and packages for that kind of application, we're extremely well positioned with our chemistry into those. So we'll benefit from those as millimeter wave starts to roll out later as well. So otherwise, they're pretty much in line with expectations.
Arun Viswanathan: Great. And just as a quick follow-up. Apologies if I missed this, but could you just address palladium? I know that it's typically a pretty robust pass-through. But is there any concerns on inflation there that you have?
Geoff Wild: So no, you're right, we pass palladium through -- sorry, Peter, you can answer.
Peter Frauenknecht: No, I think we've continued to have a very effective contractual pass-through. This is still in place and works very well. So we don't have any time gap and pass on the higher pricing to our customers. And we outlined the effect with when you look at the presentation, exactly what we see as an uptick on our sales.
Operator: Our next question comes from the line of John Pitzer from Crédit Suisse.
John Pitzer: Congratulations on the strong results. Geoff, I'm just kind of curious on the revenue guide. You're raising the full year by less than what you beat Q1 and presumably, Q1 was impacted by supply constraints that are likely to get better throughout the year. So I'm just kind of curious as to, one, how much of a hit were some of the supply constraints directed in direct to your business on the calendar first quarter? And how do you see those sort of progressing throughout the year?
Peter Frauenknecht: Well, I think, first of all, John, I think it's important to notice the overperformance also related to FX and substantial growth. I think we are very much and very well converted the higher growth into a higher guidance for the full year. We see that there is some smaller negative impact on the overall automotive market for the year, which we see now volumes moving from '21 to 2022. But we also see, on the other hand, that markets outside the automotive market are growing very well, growing above our expectations. In addition, as we said, we were able just to move our expectations for Electronics to the upper end, what we initially thought, as we see higher growth rates in smartphones, higher growth rates, particularly also for PCs for demand being triggered by work from home.
Geoff Wild: And John, I'd just add that we just replied that -- we've managed, I think, the supply chain issues very well. There were some shortages in some places. We managed to bypass them. Where we had multiple containers stranded because of Suez, we were able to get shipments out by air. It increased our cost slightly, but the priority is obviously to keep our customers satisfied. So that will be working through, I think, by the end of the second quarter.
John Pitzer: That's helpful, Geoff. And then as my follow-up, clearly, in the Electronics business, if you look at the semiconductor industry, there's a clear drive for regionalization or domestication of semiconductor production along national security lines. And I'm just kind of curious, when you think about the supply chains to which you play into, what would be the impact to your business if we saw supply chains become a little bit more sovereign and a little bit more redundant. How do I think about that from your need to kind of change your geographic footprint or for your customers to change their geographic footprint and what that might mean for your business?
Geoff Wild: Thank you. The short answer is we're fairly agnostic to these. We've got a very good global structure. We've got supply chains that are built and supplying our 14 factories regionally. We have worked very hard over the years to avoid -- over the last 5 years to avoid what were quite a few single sources. So we've dramatically reduced those now, so that we have much better qualifications in local areas. Where we do see business moving around, for example, out of China into Vietnam or into Malaysia, we're able to follow it with our teams, both on the supply and demand side. So I think it's an Atotech strength actually that we have a remarkable purchasing and supply and customer support facilities in all major regions of the world where this matters. Perhaps the 1 exception was Mexico, where we're now building a new plant.
Operator: And your next question comes from the line of Laurence Alexander from Jefferies.
Laurence Alexander: Two questions. First, when you're selling into a new fab, when you consider the mix of products that they're developing, is that going to be neutral or positive or negative to margins relative to your current business? And secondly, you mentioned sort of some new services that you're excited by. Should we think of this as an example of the Atotech culture at work and its constant renewal in the business? Or is this something which we should be -- start tracking as a kind of new initiative that represents a departure and an improvement in the business?
Geoff Wild: Thank you, Laurence. On the first one, I think it's positive that as new fabs are being built, the mix helps us because of the qualifications that we're doing on interconnect and packaging. So we do better at the leading edge. We consciously disconnected from things in general, like dual damascene, a few years ago and have concentrated on connecting and packaging and HDI. So this is -- this gives us a much better mix and position and will help our margins in the new fabs going forward. With regard to the new services we mentioned, I was primarily referring to software services though and I think the way to look at it is not just the general Atotech constant renewal. More departure into new ways that we can drive differentiation on our equipment and services for the support of that equipment and improved chemistry utilization. So it's not large today, but over the next 5 years or so, I think it is worth tracking as a significant improvement to our business.
Laurence Alexander: And if you don't mind, and I can't help it, can you give a sense for how large you would like it to be as part of your business in, say, 5 to 7 years?
Geoff Wild: I led myself into that, didn't I? Look, we -- I don't know it today. Peter, do you want to comment? We've previously said it could be in the range of $50 million, this kind of thing in sales. And I think that's the kind of a ballpark I'd give you today.
Operator: And your next question comes from the line of Jeff Zekauskas from JPMorgan.
Silke Kueck: It's Silke Kueck for Jeff. Can you quantify what the mix price benefit was as part of your organic growth, both in Electronics and in GMF?
Peter Frauenknecht: Well, again, I think it goes back to pretty much difference we have with chemistry margins versus equipment margins. And as we have pointed out earlier, we're running some kind of a razor blade model where we have competitive prices out for equipment solutions with very strong margins for our chemistry business. And as the equipment business growing very strongly in the first quarter also coming up very strongly in the second quarter, you see a dilution of the margins. The underlying chemistry margins are very strong. And if you also pull out the palladium price pass-through effect, in fact, they benefit from high growth rates and from the organic growth.
Silke Kueck: So it's all of the organic growth volume? Or is any of the organic growth related to mix or price?
Peter Frauenknecht: No. We -- predominantly coming out of volume. It just can assume pretty much a flat pricing going forward.
Silke Kueck: Secondly, like it seems that what normally happens in the first quarter in China is that there's maybe -- maybe it's like a week or 2 weeks of production is usually slow, maybe it shuts down because there's the Chinese New Year and people travel. But this year, like it didn't happen. And so like it is as if you have -- like it seems for many of the companies, it's like you had like an extra week or 2 of production, you normally wouldn't have. Do you have that same experience? And can you quantify like how much of a benefit that was to your growth in the first quarter?
Geoff Wild: So you're absolutely right. We worked hard through Chinese New Year, particularly our equipment factory was working flat out. We -- our employees were actually happy to do this because restrictions meant that they weren't able to travel home as much as in previous years. So we got some benefit from that. And as you've seen in our results and commentary, our chemistry business continued to grow nicely in China during this period. So it was all hands on deck.
Silke Kueck: And then if I can ask a last question. Are you -- do you typically calibrate your palladium purchases when there are price swings? Like I understand you can pass it all through, but is this the case that as palladium prices rise that you buy a little less and you sort of like make up the purchases like later in the year?
Peter Frauenknecht: Well, we don't have any speculation in there. We've purchased what we need for production and passed exactly the price which we incur for production onto our customers. So again, I think there's no lack -- there's a medium pass on to our customers.
Operator: And your next question comes from the line of Ben Kallo from Baird.
Ben Kallo: Congratulations. Maybe some bigger picture questions. You guys are new to the public markets, and I think it helps to reframe it. I've heard you say the equipment sales are going to be dilutive to margins a couple of times in the call. But could you talk to us about how those equipment sales help for visibility and then the lag time between the equipment sales and then when we see the uptick from the chemical sales is my number one question. And then number two, we focus a lot on 5G as a driver. Coming from my area of focus, what is electrification of vehicles as a driver and how you could frame that as well as energy, I say new energy, but it's really energy now, solar and wind and your exposure there. And I'll leave it at that.
Geoff Wild: Ben, thank you very much. On your first question, typically, we're almost fully booked on equipment at the moment. And that's both because of expansion and new technology increases. The lead time and lag on those is that we get an order. Typically, it takes us 6 months to manufacture and 3 months to install and then 3 months to commission. So the lag is about 12 months from when we first get the order to when we're putting in chemistry, commissioning the line, and then depending on the size of the line, that chemistry will continue over the lifetime of the equipment. So it's roughly a 12-month leading indicator from when we get the orders to when we're deriving chemistry revenue. On your second question, thank you for those. As 5G is obviously a good driver for electrification of vehicles, we believe we get about 30% more vehicles from electric -- hybrid and electric vehicles. This is driven by increased context, increased lightweighting plating of plastic components, a variety of sensors and so on which provide good business and tailwinds for us. Similarly, in the solar and wind area, and the wind power, as I touched on in the presentation, we provide materials that are good for corrosion protection in salt water environments for offshore wind generation, for example. And this business is growing very nicely for us with some corrosion protection electroplating materials. For solar, we've got several applications, but the big one I touched on is that today, the connection's made with silver paste. The trouble with that is it can be quite brittle and on installation if somebody say walks on top of the panel, it can crack. So we've introduced a range of which we're starting to increase nicely in sales and getting a lot of attention is for copper electroplating to put down those lines instead. They're more ductile. They don't crack when they're slightly bent. And they're also cheaper to manufacture, and they can have longer durability as well. So these are some examples of where we're using drivers in alternative energy as well. And I think they'll be good drivers for us in the years ahead. I hope I answered your questions.
Ben Kallo: Yes. If I could sneak 1 more in. I guess, if I boil it all down, you guys have significant areas to deploy capital. And you have this successful IPO. I'm just wondering how you guys think about your balance sheets and all the opportunities you have and the capital allocation related to it.
Peter Frauenknecht: Yes. I think the -- let me answer that. I think our capital allocation rules really haven't changed. And the key focus is to support organic growth. We see great potential to grow organically. We might have bolt-on acquisitions in the range as we had previously, but a key focus for us is really to delever to the range between 2 and 3x as we have indicated to the market. And I think that's the capital allocation priorities we set and we continue to follow.
Operator: And your next question comes from the line of P.J. Juvekar from Citi.
P.J. Juvekar: Geoff and Peter, a couple of questions. First, in -- you mentioned that you have higher sales -- third higher sales in EVs compared to ICE cars. What's your market share in EVs versus ICE?
Geoff Wild: P.J., it's a fair question. I don't know how to answer that off the top of my head. I can't give you the relative market shares. I would just say that we are improving on market share on EVs slightly because of the different applications and because of the work we've done with OEMs, but I would hesitate to give you actual numbers. Sorry.
P.J. Juvekar: Okay. No, that's fair. And then you talked about the IIoT market and coatings for those, I guess, I'm not very familiar with that market. How big is the TAM there and who do you compete in that space?
Geoff Wild: So we see this as a very significant driver because of all the sensors and because of the connectivity. And we're getting multiple inquiries for this area. It ranges from high-end type of things, to sensors, pressure sensors, materials that are required for generating sensors and the software to integrate them in as well. And when I referred to IIoT in the comments, I was mostly referring to the software area. But with the ubiquitous rise in sensors into this kind of area, we're very well placed with the kind of the electrification of everything. And so we see this as a good general driver. Just to remind you, in GMF, only about half our business is in automobile, and the rest is in a wide variety of industrial coatings. And we have widespread applications through our PCBs and semiconductor packaging beyond 5G into multiple applications of this area. So it's a good general growth driver for us.
Operator: And there are no further questions at this time. Presenters, I'll turn the call back over to you.
Geoff Wild: Thank you very much, operator. So everybody, thank you very much. I'd like to thank everybody on the call for the questions and your attention and interest in Atotech. If I may, I'd just like to summarize the key points from today's call. Supportive end markets and the investments we've made in our technology and products have led to a record quarter. As the world recovers from the pandemic, we know it won't be a straight line, but the fact that we did not scale back during the hard times is now serving us well as I believe we are very well positioned to capture future growth in new technology trends today. Our recent refinancing and stable capital structure provides a solid base from which to generate free cash flow and fund future growth. Atotech is a key enabler of the information age value chain, as we've just discussed, and we believe that our growth will continue to outpace that of our end markets. And if I may, I'd like to close with my deepest thanks to the entire Atotech team around the world, your hard work, energy and commitment are inspiring, especially in the face of the continued pandemic and the supply chain issues we've recently seen. You are what makes Atotech a cutting-edge company after over 100 years of existence. Quarter 1 2021 has been our first quarter as a public company and an excellent demonstration of why we believe we will become one of the world's most respected specialty chemicals company. With that, thank you very much, everybody, and we'll end the call.
Operator: And ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
