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spk10: Good morning, everyone, and thank you for joining Autotech's first quarter 2021 earnings call. A replay of this webcast will be available on our website for six months. Please note that Autotech provides non-IFRS information and reconciliations between IFRS and adjusted measures are included in our presentation materials, 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 about 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. And with that, I would like to turn the call over to Jeff.
spk05: 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 are 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 in 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, and I refer here to the semiconductor shortages, plastic supply issues, winter storms in the U.S., particularly the deep freeze in Texas, as well as the unfortunate blockage of the Suez Canal. While we remain firmly convinced that the impact of these disruptions will be resolved as we move through the second half of this year, we do observe impact to the auto market recovery, which is delaying some production volumes as well as causing higher freight expenses and material costs. We are doing our utmost to mitigate these effects, and you can be sure that the guidance Peter will give takes those concerns into account. We maintained a high level of profitability, increasing our adjusted EBITDA by 32% year over year, and generating a solid adjusted free cash flow from operations, which was affected by the timing of some payments. This quarter, our net leverage ended at 3.7 times EBITDA. This is a significant reduction from pre-IPO levels. And as Peter will recount shortly, we've also successfully refinanced our debt position. Now I'd now like to update you on some of the key initiatives that we are working on today. To start, we continue to invest in not only our chemistry, but also the equipment with which we drive chemistry revenues. Particularly in electronics equipment, we're dedicated to creating a platform approach that will be interchangeable across all end-use technologies. We expect that will provide us with the flexibility to leverage trends as they appear, develop new lines quickly, and also provide our customers with an excellent value proposition. Further, the pandemic has driven significant technology advances worldwide, and at Atatech, we're committed to maintaining our leadership through digitalization of our processes. To that end, we've launched several projects. Internally, we are implementing IIoT, or Industrial Internet of Things, capabilities for our plating applications, that we anticipate will help our customers increase their throughput and improve quality. We've also started an e-commerce project in an effort to become a better partner to our existing customers, to access new customer segments, and to enable seamless omnichannel customer interaction. We have some quite ambitious multi-year goals in this area, but are starting small and aim to have a pilot launched by the end of this year. This is the first initiative of what I hope will be an array of new services to customers. In March, we formally opened our development center in Manasa, India, and commissioned our newest chemistry production site in Yangzhou, China. We are also excited to have broken ground on our newest production facility in Corazero, Mexico. This new plant will meaningfully increase our production and warehousing capacity in Mexico, which supports production capacity we need for the expected increase in business in the Americas region overall. For our employees, the new plant offers optimal working conditions in an attractive location with state-of-the-art technical and safety equipment. Last quarter, I received some questions around ESG and I'd like to close with an update of our activities. As a newly public company, we understand that we need to develop useful and transparent reporting practices in all areas, and especially including ESG. And to that end, we're increasing our resources so that we can complement our already existing and deep internal reporting with best practices when it comes to external reporting. Although this may not be a quick exercise, over the course of the next year, we expect to greatly improve our external reporting efforts in this area. Of course, reporting is only one-sided, the ESG coin, The other more interesting aspect is the opportunity side and what our products and technology can do for our customers and the global efforts to reduce the environmental burden of manufacturing. Atotech has a long history in this regard. For decades, we've been pioneering the elimination of harmful substances and enabling highly efficient and environmentally sound production and manufacturing. For example, 25 years ago, we introduced our first Chrome 6 Free solutions for corrosion protection. And today, we believe our CoverTrum product is a best in class and cost effective solution for the Chrome 6 Free decorative coating of plastics. We continue to tilt our R&D towards sustainability driven markets and applications. For example, we see significant potential to translate our copper plating technologies to replace the use of silver paste in solar photovoltaic panels, which can improve the resiliency of panels while simultaneously lowering the manufacturing costs. We also supply chemistry for the corrosion protection of fasteners and joints, which are critical to the wind energy business, as well as for the electric engine development. We see sustainability as a clear growth driver for Atotec in the years ahead. And with that, I'd like to hand you off to our Chief Financial Officer, Peter Fronek, for a review of our financial results, after which we'll be happy to take your questions. Thank you. Peter, over to you.
spk08: Thank you, Jeff. 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 of following the challenging quarters at the beginning of 2020, and continue to outperform the market. Let's start on slide four. For the first quarter, our total revenue was $353 million, an increase of 25% over the prior year, including organic revenue growth for chemistry and equipment of 17%, as well as an FX tailwind of 7%, and a 1% benefit from palladium price pass-throughs. Palladium price continued to rise and contributed $4 million to our top line, while a weaker US dollar positively impacted our sales by $19 million. Broad-based secular trends in electronics and the recovery of the automotive market were the key drivers of our organic sales growth. A strong presence in the Asian market gave us the opportunity to benefit from the robust recovery of these markets. Also, our positioning at the upper end of the market, coupled with our market-leading innovation power, allowed us to convert the strong market growth rates into sales growth. I will address our two segments in detail in the later slides. Looking into our profitability, we were able to grow our adjusted EBITDA 32% compared to the first quarter in 2020, primarily driven by organic volume, partially offset by the effects of the recent supply chain disruptions. Jeff mentioned the well-known global supply chain issues earlier, and although we were not spared, the impact to our gross margin was less than 2% of sales. Key impacts which we recognized were higher freight expenses in order to maintain our service levels and various elevated inflationary effects. Our teams did a fantastic job to maintain our strong service levels in these turbulent times. We're working on multiple ways to further strengthen our supply chain and increase an efficient flow of products. We're keeping a very close eye on this as we recognize that these effects also affect us in the second quarter, and our guidance, which I will get to later, reflects our latest expectations. Adjusted EV day margin was 31.2% in the quarter, up 150 basis points. This is notable, considering the negative mixed effects, as well as the mathematical dilution of the higher palladium price. Again, the primary driver of this increase is our leverage of our organic growth in volumes, mostly in chemistry. Our margin continues to be amongst the highest in the specialty chemical industry and illustrates the quality of our business. Diluted earnings per share was a negative $55 cents for the first quarter. Using the weighted average number of shares for the respective period, the adjusted earnings per share improved from $15 in the first quarter last year to $35 per share in the first quarter 2021. The principal adjustments are the effects from the refinancing and IPO, as well as the reversal of amortization expense. We'll present a detailed explanation of the applied definition during our next quarterly call. Now let's go to slide five for a deeper look into the electronics result. Our performance in electronics continued to be very strong in the first quarter, where total revenue of $226 million increased 31% year over year. This result included organic growth of 21%, a favorable palladium impact of 2%, and an 8% benefit from FX translation. Organic growth in chemistry revenue for electronics was 15% in the quarter, underpinned by the dynamic smartphone market in Q1, especially in China, as well as the strong growth of the high-performance PCB in semiconductor-related business, triggered by higher demand due to work from home, higher value in 5G smartphones, and other ongoing technology trends. These growth trends had not fully unfolded last year, and we expect them to accelerate and define demand for the coming years. Electronic equipment sales enjoyed an outstanding quarter with organic revenue up 77%. This demonstrates the success of our integrated business model and the innovative strength which enables us to position ourselves at the best choice for our customers. As manufacturers transition to the next generation of complex PCBs in semiconductor packaging technologies, we lead the way. Electronics generated $76 million of adjusted EBITDA in the quarter, a $21 million or 38% improvement over the prior year period, primarily driven by the significant higher organic revenue at market-leading gross margins and the ability to pass higher costs through to customers. Margin was 33.6% in the quarter, up 180 basis points, primarily reflecting volume leverage on organic growth in chemistry and solid pricing partially offset by the palladium pass-through product mix and some supply chain inefficiencies. Moving to slide six now. GMF's total revenue grew 15% to $128 million in the first quarter, comprised organic growth of 9%, a 1% positive impact from palladium, and a 5% tailwind from FX. From a mixed perspective, chemistry revenues grew organically at 11%, and equipment revenue declined slightly in the quarter. These organic growth rates indicate the recovery of the global automotive market, but also shows our leading position in the strongly growing Chinese market. As Jeff mentioned, we see sustainability-focused solutions as a key growth driver for Artotech. So our current R&D emphasis aims to provide new and more sustainable solutions for the growing electric vehicle market, as well as the solar and wind energy industries. Turning from revenue to earnings, GMF adjusted EBITDA recovered powerfully to $35 million in the quarter, and the adjusted margin was 27.2%. The growth in adjusted EBITDA reflects Our leverage on the organic revenue growth offset by the increases seen in freight expenses and additional inflation associated with the supply chain inefficiencies encountered this quarter. As mentioned earlier, we think that we will continue to see some headwinds from the supply chain disruptions at least for the current quarter. Now let's move to slide seven. We generated a solid level of free cash flow despite seasonal working capital effects and some extraordinary impacts, including the accrued cash settlement of the transit pricing audit in China, the ramp-up of our Yangzhou production facility, and additional safety stocks. As a result, at quarter end, we had $213 million of cash in a revolving credit facility with $233 million available. So in total, a liquidity of 445 million, which provides a comfortable position in any scenario. As we used our IPO proceeds to delever, and we continue to show our ability to generate strong cash flows, our net leverage has improved to 3.7 times our adjusted EBITDA. As a reminder, we used the net proceeds of the IPO to completely pay off the 220 million balance of our whole core notes and the 420 million outstanding of the senior notes. Following our public listing in March, we also very successfully refinanced our outstanding senior secure credit facility with a new US dollar denominated 1.35 billion term loan, a 200 million euro denominated loan, and a 250 million multi-currency revolving credit facility. We're very pleased that we were able to secure very competitive interest rates for our new term loans, which will mature in 2027, thus significantly reducing our capital costs. Also, the strong business performance and lower leverage allowed Moody's and S&P to upgrade their ratings for Autotech to B2 and B+, respectively. Moving on to slide eight. Coming to our 2021 full year guidance, after our first quarter as a publicly listed company, I'm pleased that the outlook for our business allows us to raise our guidance range. Just two months ago, we expected a growth range of 10 to 12% for the total revenue. We now raise that to 11 to 13%. While some of our Q1 growth rates look stronger, Please remember that the pandemic effect started in China in Q1 2020. The rest of the world followed in the second quarter 2020, but China, our most important sales market, recovered quickly in the back half of the year. So although we are lapping easy comparison quotas now, the comparison base becomes more difficult later in the year. Moving on. When we come to our key performance indicator of organic revenue growth in chemistry, we move our expectations for electronic chemistry up to the higher end of the range and also raise expectations for GMF chemistry by a percentage point. This allows a forecast of approximately 9% organic growth in chemistry revenues. We are raising our guidance for the full year for adjusted EBITDA from between 405 to 425 million to a range of 415 to 435 million, which increases growth at the midpoint by nearly three percentage points to 17%. This reflects an increased confidence in our top-line growth potential, as well as the benefits from operational improvements. Our underlying assumptions for our guidance are, as previously, the 6% global GDP growth forecast from IMF, end market expectations of agencies such as IHS Markit and IDC, the continued recovery from the COVID-19 pandemic, and March FX rates for our major currencies. Our CAPEX guidance remains unchanged at approximately 4.5% to 5% of total sales in 2021, with about $10 million of this investment triggered by the construction of our new manufacturing facility in Mexico, which will help us to drive growth in the coming years. As we communicated to you in March, our guidance for interest expenses already anticipated the refinancing activities. Therefore, we confirm that the range for normalized interest expenses anticipated to be between 70 and 74 million for the year. This is based on our new capital structure, but does not include one-time costs related to our refinancing activities. Please note that the refinancing has triggered roughly 59 million in one-time costs connected with the early extinguishment of our holdco and opco notes, as well as the financing fee amortization, all of which were recognized in the first quarter, but is not reflected in our full year interest expense guidance. Finally, our effective tax rate, which includes income and withholding taxes, should be unchanged at around 30 to 31%. Looking forward to the second quarter of 2021, In keeping the effects of lapping the worst pandemic quarter in mind, we feel confident in expecting organic total revenue growth for the second quarter to be comfortably above 20% compared to the second quarter 2020. Giving our strong operating leverage and assuming exchange rates as of the end of March, This should give us an adjusted everyday growth of around 50%. With that, I think we can open the floor for questions. Operator, please.
spk10: Operator, can we please begin the questions?
spk07: Okay, as a reminder, to ask a question, you will need to press star 1 on your telephone. And to read your question, press the pound key. Please stand by while we compile the Q&A queue. And your first question comes from a line of PJ Juvicar from CT. Your line is now open.
spk02: Yes, good morning, good afternoon, or good evening, everyone. You know, 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?
spk05: PJ, 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 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 at 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 before with Moore's Law 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're seeing this as a good growth driver. Thank you for the question.
spk02: Great. And if I may ask one 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? Thank you.
spk05: The software company we bought with about 80 employees, many of whom are in 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, help 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 our custom software for our equipment, but it will expand into other related areas and services as well.
spk02: Great. Thank you so much.
spk05: Thank you, Pajit.
spk07: And our next question, going to the line of Steve Biglader from Deutsche Bank. Your line is now open.
spk03: Thank you. Good morning. Thanks for taking the question. This is Catherine Griffin on for David. So first, if we could just talk about some of the strengths 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?
spk05: 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 sense of recovery. In 5G, for example, we're in the first year of an approximately five-year rollout. We're seeing increasing adoption for 5G smartphones, and more 5G smartphones are now being introduced, with millimeter wave really still to follow. So currently we're only accounting for about 35% penetrations 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 as for our general printed circuit board area and in quarter one we exceeded even that and the reason is because of these high density InConnect and chiplet 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 pick up anything on the quarter?
spk08: Yeah maybe just a comment on margin as you mentioned it we see a 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 strong secular growth trends in the market and with a very strong innovative position.
spk03: Great, thanks. 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, you know, for the full year? Can you just speak to any raw material availability issues you may be having? Any color would be helpful there. Thanks.
spk08: Yes. So, first of all, just... I 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 prices go up in many areas as well. We address that and also for other materials with a minimal time lag 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, Catherine?
spk03: Oh, yes. Thank you.
spk08: Thank you.
spk07: And your next question comes from the line of Josh Spector from UBS. Your line is now open.
spk00: Yeah. Hey, guys. Thanks for taking my question. You know, 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?
spk08: Well, I think when you look at the second quarter, we continue to see strong growth rates. We continue to see a strong conversion of sales, particularly of our chemistry business, into sales. into margins, please keep the mixed effect in mind. Please also notice that we expect a very strong second quarter with the equipment business, which naturally runs with a smaller margin.
spk07: And your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.
spk06: Great. Thanks for taking my question. 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 the growth kind of above your expectations?
spk05: Yeah, 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 guess, 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're 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're a plan of record on 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 antennae 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.
spk06: 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?
spk05: So, no, you're right. I passed Palladium through. Sorry, Peter, you can answer that.
spk08: 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 when you look at the presentation, exactly what we see as an uptick on our sales. Thanks.
spk07: Your next question comes from the line of John Pitzer from Credit Suisse. Your line is now open.
spk09: Yeah, good morning, guys. Thanks for letting me ask the questions, and congratulations on the strong results. Jeff, 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 and direct to your business on the calendar first quarter, and how do you see those sort of progressing throughout the year?
spk08: Well, I think, first of all, John, I think it's important to notice the overperformance also related to ethics and substantial growth. I think we very much and very well convert 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 2021 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.
spk05: And John, I just add that to Peter's reply 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 costs slightly, but the priority was obviously to keep our customers satisfied. So that will be working through, I think, by the end of the second quarter.
spk09: That's helpful, Jeff. And then as my follow-up, clearly in the electronics business, You know, 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?
spk05: 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 last five 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 architect's strength, actually, that we have remarkable purchasing and supply and customer support facilities in all major regions of the world where this matters. Perhaps the one exception was Mexico, where we're now building a new plant.
spk09: Thank you. Helpful.
spk07: And our next question comes from the line of Florence Alexander from Jefferies. Your line is now open.
spk04: Good morning. 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 there are some new services that you're excited by. Should we think of this as an example of the out-of-tech culture at work and there's a constant renewal in the business? Or is this something which we should start tracking as a kind of new initiative that represents a departure and an improvement in the business?
spk05: Thank you, Lawrence. 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 Joel Damman seen a few years ago, and have concentrated on connecting and packaging and HDI. So 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 and I think the way to look at it is not just the general architect constant renewal, more departure into new ways that we can drive differentiation on our equipment and services for the support of that equipment and improve chemistry utilization. So it's not large today, but over the next five years or so, I think it is worth tracking as a significant improvement to our business.
spk04: And if you don't mind, then 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, five to seven years?
spk05: I let myself into that, didn't I? I don't know today Peter do you want to comment we 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 ballpark I'd give you today thank you and again if you would like to ask a question just press star 1 on your telephone keypad and your next question from JP Morgan your line is now open
spk11: Hey, good morning. It's for Jeff. How are you?
spk07: Good, I am.
spk11: Good. Can you quantify what the mixed price benefit was as part of your organic growth, both in electronics and in GMF?
spk08: 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 is 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 higher growth rates and from the organic growth.
spk11: So is all of the organic growth volume or is any of the organic growth related to mix or price?
spk08: No. Predominantly coming out of volume, you just can assume pretty much a flat pricing going forward.
spk11: Mm-hmm. Um, secondly, like it seems that what normally happens in the first quarter in China is that, you know, there's maybe, you know, maybe it's like a week or two weeks where production is usually slow, maybe it shuts down because it's the Chinese New Year and people travel, but this year, like it didn't happen. And so, like, you know, it is as if you have like, you know, like it seems so many of the companies that is, you know, it's like you had like an extra week or two production, you normally wouldn't have. Did you have that same experience? And can you quantify how much of a benefit that was to your growth in the first quarter?
spk05: So you're absolutely right. We worked hard through Chinese New Year. Particularly our equipment factory was working flat out. 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.
spk11: And then I can ask a last question. Do you typically calibrate your palladium purchases when there are price swings? I understand you can pass it all through, but is it the case that as palladium prices rise, that you, you know, buy a little less and you sort of, like, make up the purchases, like, later in the year?
spk08: Well, we don't have any speculation in there. We purchase what we need for production and pass exactly the price which we incur for production on to our customers. So, again, I think there's no lack. There's a medium pass on to our customers.
spk11: Okay. Thank you.
spk08: Thank you.
spk07: And your next question comes from the line of Ben Callow from Baird. Your line is now open.
spk01: Hey, Jeff and Peter. Thanks very much. Congratulations. Maybe some bigger picture questions just because you guys are new to the public markets. I think it helps to reframe it. I've heard you say the equipment sales are going to be diluted to margins a couple times in the call. but could you talk to us about how those equipment sales help for visibility in 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, but solar and wind and your exposure there. And I'll leave it at that.
spk05: Ben, thank you very much. On your first question, typically we – uh... We're almost fully booked on the equipment at the minute, 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 six months to manufacture and three months to install and then three 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. leading indicator from when we get the orders to when we're deriving chemistry revenue. On your second question, thank you for those. 5G is obviously a good driver for electrification of vehicles. We believe we get about 30% more vehicles from hybrid and electric vehicles. This is driven by increased contacts, increased light weighting, 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, in the wind power, as I touched on in the presentation, we provide materials that are good for corrosion protection in saltwater 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 connections 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 which is 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.
spk01: Yeah, if I could sneak one 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.
spk08: Yeah, 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 bought on acquisitions in the range as we had previously. But a key focus for us is really to deliver to the range between two and three times as we have indicated to the market. And I think that's the capital allocation priorities we set and we continue to follow.
spk01: Great. Thank you very much.
spk08: Thank you.
spk07: And your next question, Consular Line of PJ Juvicar from CP. Your line is now open.
spk02: Hey, Jeff and Peter, a couple of questions. First, you mentioned that you have higher sales, a third higher sales in EVs compared to ICE cars. What's your market share in EVs versus ICEs?
spk05: PJ, it's a fair question. I don't know how to answer that off to the top of my head. I can't give you the relative market shares. I would just say that we're 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.
spk02: 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? Thank you.
spk05: 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 ADAS type of things to sensors, pressure sensors. materials that are required for generating sensors and the software to integrate them in as well. When I referred to IoT 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 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 for our PCBs and semiconductor packaging beyond 5G into multiple applications of this area. So it's a good general growth driver for us.
spk02: Great. Thank you.
spk05: Thank you.
spk07: And there are no further questions at this time. Presenters, I'll turn the call back over to you.
spk05: 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 as well, as I believe we're very well positioned to capture future growth in many 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 neighbor 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 Atotek 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 Atotek a cutting-edge company. After over 100 years of existence, Pure to One 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 companies. With that, thank you very much, everybody, and we'll end the call.
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