Q4 2020 Atotech Ltd Earnings Call
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Good morning, and welcome to <unk> fourth quarter 2020 earnings Conference call. Today's speakers are Geoff Wild <unk> Chief Executive Officer.
Peter from net.
And <unk>, Chief Financial Officer, and Paul Goldberg, the head of Investor Relations.
After the Speakers' remarks, there will be a question and answer period.
You ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound key.
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I will now turn the call over to Mr. Goldberg. Please go ahead Sir.
Thank you Sylvia and good morning, everyone and thank you for joining AMETEK initial earnings call as a public company.
A replay of this webcast will be available on our website for six months.
Please note that out of Tech provides non ifr S information and reconciliations between Ifr S. And adjusted measures are included in our presentation materials, which are available on our website.
Like to remind everyone that our comments today contain certain forward looking statements that are inherently subject to uncertainties and risks.
We caution and everyone to be guided and their analysis of that attack by referring to our recent 20-F filing for a list of factors that could cause our results to differ from those anticipated and any such forward looking statements.
Also we undertake no obligation to publicly update or revise forward looking statements, except as required by law and.
And with that I will turn the call over to Jeff.
Thank you, Paul and good morning, or afternoon, and happy Chinese new year, and the University Ox to you all before we get started I just want to let you know how excited we all ought to begin our journey as a public company our team members customers and other partners have long been a wherever it is to get innovation and value we bring to them.
Markets were delighted that we can now share a story with a wider audience and look forward to engaging with you on a regular basis with that let's begin on slide three please.
We are very pleased with our fourth quarter performance, we leverage the continued strength in our electronics end markets as well as the ongoing recovery and global automotive markets to deliver organic chemistry growth in both segments.
Organic chemistry growth was complemented by strong growth and our electronics equipment business, resulting in overall organic growth rate of 90%.
We also grew adjusted EBITDA improved free cash flow and reduce leverage in the fourth quarter Pizza will share. These details as well as our 2021 guidance later in this presentation.
But perhaps even more important and a strong finish to 2020, all the initiatives and decisions, we took jewelry and the year and even before them, which are well positioned us for what we believe will be a very constructive market in 2020 one.
Oh for 'twenty, and 'twenty and despite the challenges of the pandemic, we continued to invest and the long term best interests of our business, especially regarding our footprint and technology.
Now as we begin the new year, I'm happy to say that separately and extra tapes up there and fleet, including our recently completed new production facility in Guangzhou, China, which is now fully functional this facility as our second chemistry plant in China. It will provide additional capacity to serve the large and growing electronic.
Some general metal, finishing markets and the east North and center of China. It's also creates important operational redundancy with a larger chemistry production site in Guangzhou.
The investments we've made in R&D and digitalization and also paying dividends, including a focus on delivering new and innovative solutions connected for next generation semiconductor packaging as.
And that's one example of advanced satellite to copper youth and three chemistry, that's been developed for the specific needs of next generation fan out wafer level packaging. Its superior purity ensures that our customers have the highest reliability with no cracks or micro boyd's volumes are ramping up for other U S.
And he chemistry applications as well.
Another example is our market leading unit plate equipment line embedded in the semi custom semiconductor packaging supply chain. This equipment is used and ultra thin production applications within the high end IC substrate manufacturing process as well as for the production of leading edge smartphone components.
And as we've communicated before these install blinds will pull through our chemistry over an extended period.
Another important area of investment for Alphatec as digitalization, a 'twenty 'twenty acquisition of Vizio Tech enabled us to quickly expand the digitalization capabilities speed up production development and build a software based business model.
We are aggressively pushing towards commercializing a suite of tools that will enhance production and quality efficiency and system availability for our customers while at the same time, reducing costs and creating stickier customer relationships for epic.
No one else and our industry is able to provide chemistry equipment software and leading edge Global service and we believe this is a sustainable competitive advantage.
Now, let's talk about the current state of our markets and a little more debt within electronics demand for five G infrastructure networking equipment and service is very solid driving demand for chemistry to manufacture high frequency P T b's and like to pull them and semiconductors.
Additionally, the semi packaging space is extremely strong and we're benefiting from our focused investments in this area over the past few years. The evolution of semi packaging is leading to more plated layers and the wafer level and more plate. It layers at the IC substrate level, all of which are positive for ratajczak.
In terms of content and chemistry value the market is experiencing strong growth for GPU and CPU chips, which in turn is driving strong IC substrate growth. In fact, a recent forecast said semiconductors will grow about 8% annually from 'twenty to 'twenty, one through 'twenty, and 'twenty, four and Fannie and fan out and.
For $2 five day packages will grow around 10% annually over the same timeframe three D packages could grow over 20% annually.
Now regarding swap phones got more recently forecasted that worldwide unit shipments are expected to be about 1.5 billion and 'twenty 'twenty, one or 11% growth over 2020.
Within this total five G smartphone units are expected to reach over 540 million units up from about $213 million in 2020.
And so it gets roughly 50% more revenue on a high and five G phone versus an average for <unk> from so the growth and the market compounded by the overall growth of five G is a great setup for us.
And additional demand for electronic automotive products is rapidly improving despite temporary near term chip shortages with our affecting OEM production schedules. We believe these problems created by surging demand will work themselves out and the coming quarters.
And G and F. We're pleased that the global auto markets led by China, but broad based have continued to show sequential improvement from the pandemic driven low point and the second quarter of 2020.
As we begin 'twenty 'twenty, one we expect strong growth in virtually all of G and maps of markets, but particularly and the global auto markets, reflecting a strong rebound and Buffalo base, but also for multiple secular drivers.
Among the more impactful trends auto premium amortization for electrification and light weighting and sustainability on the premium amortization front, we're seeing solid demand for our decorative and functional chemistries used and advanced exterior and interior design applications as well as and corrosion protection and.
And wear resistance applications, all of which contribute to vehicle safety and longevity.
Regarding electrification and light weighting, we see for the high value chemistry demand fueled by our Oems growing use of new plastics, and lightweight metals and related new challenges like contact corrosion.
And with respect to sustainability, we expect secular Lee increasing demand for protein and six fleet chrome plating processes, driven by strict environmental regulations, such as Leach and continued global demand for new grown colors enabled by chrome six alternatives here as it takes products like flight grown blueprint.
And the coverage one address these customer needs and.
The leading edge of technology for this space.
Finally, we also expect very solid demand and other Gms markets like cemetery household appliances, and construction and additional chemistry used in applications like solar panels and wind turbines should continue to grow as the world continues to evolve towards Green energy. So in summary, we see it.
Every constructive demand environment across our portfolio and expect 2021 to be a good year of growth.
With that let me hand over now to Peter for a review of our financials and about 'twenty 'twenty, one guidance and I'll be back with some closing comments. After he's finished Peter over to you.
Thank you chip good morning, everyone I'm very excited to go through a strong Q4 financials with you. The first time as a public company.
Let's start and slide four.
As Jeff said.
And we're very pleased with our fourth quarter results and believe that we were once again able to outperform our underlying markets. Our teams did a great job of delivering results and dynamic market.
Turning to service our customers at the highest level.
Carefully managing costs.
For the fourth quarter total revenue was $365 million and increase of 18% over the prior year, including organic revenue growth for chemistry, and equipment was 9% as well as an FX tailwind of 4% and a 5% benefit from Palladium pass through.
And <unk>.
Organic chemistry revenue, a key performance indicator increased 5% and the fourth quarter and reflects growth in both segments.
Electronics was very strong and grew 14% organically.
And the drivers like five G infrastructure next generation smartphones cloud computing and evolving technology and semiconductor packaging are propelling sustained growth.
And during the last few quarters.
I'll go deeper into electronics and a few minutes.
<unk> posted revenue of $133 million, representing 7% growth over the prior year.
We were pleased to see <unk> returned to growth after several quarters of year over year declines.
<unk> organic revenue growth of 2% was largely driven by rapidly improving industrial production, especially and the global automotive sector.
I palladium prices contributed.
For 2 million to our top line, while a weaker U S dollar positively impacted our sales for $12 million.
Palladium continues to rise.
And it was up about 25% and the fourth quarter 2020.
Over the fourth quarter 2019.
As a reminder, changes and the price of palladium directly impact or chemistry sales, it's a straight pass through to our customers, but do not meaningfully affect EBITDA.
Salting and some impact on our reported relative margin mathematically.
Moving to the P&L, we generated adjusted EBIT da da.
And the $6 million and the fourth quarter, which exceeded our expectations heading into the quarter and.
It was a $5 million increase over last year.
Overall, our solid Q4, EBITDA result was driven by earnings and strong organic chemistry growth stable pricing productivity and our focus on cost management offset in part by increases in compensation accruals and the quarter.
<unk> strong our full year performance.
We believe our positioning as a critical supply and electronics value chain now focusing on the high end of our markets will enable us to drive earnings growth moving forward.
We also had a modest benefit from asics and the quarter.
Adjusted EBITDA margin was 29, 1% and the fourth quarter.
Margin was impacted by the mathematical impact of Palladium pass through the mix of equipment versus chemistry.
And by the increased compensation accruals, partially offset by cost controls and productivity excluding.
Excluding palladium.
Mix and the accrual increase adjusted margin was essentially flat with last year.
Our margin continues to be among amongst the highest and the specialty chemical industry and <unk>.
Illustrates the quality of our business.
Now, let's go to slide five for a deeper look into the <unk>.
Chronic for Sox.
Our performance and electronics accelerated and the fourth quarter with total revenue of 232 million increased 25% year over year.
This very strong result included organic growth of 14%, a favorable palladium impact of 5% and.
Five per cent benefit for them, it's ex translation.
Organic chemistry revenue for electronics grew 7% and the quarter, reflecting continued solid demand.
For our innovative electronic chemistry solutions.
Customers customers are still gravitating towards our higher value added chemistries as they continued to ramp up for <unk> and for use and complex Pcbs semiconductor packaging IC substrate and even high growth consumer variable applications.
Our market, leading broadened offering of plating lines, including unit blade and the recently introduced polygon drove equipment revenue up 56% over the prior year.
Quoting activity for electronics equipment remains quite strong.
And basically sold out for the first half of 2021.
Encouragingly, we expect the second half to be busy too.
Plus we get the benefit of incremental chemistry pull through.
Shipment comes on line.
Electronics generated $70 million of adjusted EBITDA in the quarter of $6 million or 9% improvement over the prior year period.
Primarily driven by.
By the higher organic revenue stable pricing and tight cost control.
Margin was 32% and the quarter, primarily reflecting the pass through impact of palladium product mix and the increased compensation accruals.
Got it and the product mix, we had strong growth and equipment, which carries a lower margin, but nature, but serves as an enabler for future high margin chemistry revenue.
Adjusting for these items margin was largely consistent with last year.
Our best in class margin for chemistry, sustainable and speaks to the strength of our business and the value we provide our customers.
Moving to slide six now.
<unk> total revenue grew 7% to $133 million and the fourth quarter.
Comprised of organic growth of 2% three.
3% positive impact from Palladium, and a 2% tailwind from FX.
From a mixed perspective organic chemistry grew 3% and equipment revenue was slightly down and the quarter.
As already discussed.
And we're very pleased to see organic growth being positive and the quarter. After the market challenges we faced in light of the pandemic, especially in the second quarter of 2020.
A solid fourth quarter performance is mainly attributable to rapidly improving global automotive markets continued constructive sanatory markets and from growing interest and our sustainability focused suite of solutions.
Turning from revenue to earnings.
<unk> adjusted EBITDA was $36 million and the quarter and adjusted margin was 27%.
Adjusted EBITDA was flat with last year, reflecting earnings on organic growth essentially offset by the previously mentioned increased accruals.
Adjusted margin, excluding the impact of Palladium and accruals was largely in line with the prior year period.
These results are amongst the highest of all specialty chemical companies, serving industrial markets and we believe they will improve.
So underlying markets continue to strengthen.
Let's now move to slide seven.
2020 was a good year for cash generation for it to tick we generated adjusted free cash flow from operations before debt service of and the $20 million and the fourth quarter up 15% and generated 262 million for the full year.
This strong performance enabled us to repay 80 million for a holdco notes and the fourth quarter.
Also at quarter, and we had for $549 million of liquidity and improved our net leverage to five one times.
We believe this performance is very indicative.
For the company's ability to deleverage around a half a turn per year going forward.
We feel very good about the wave and navigate through the pandemic, which showed the stability of our business and our cash generation abilities.
More important than how we finished the year.
Where we are now post the IPO as you know we completed the IPO and February eight.
And sold 23 3 million shares at $17 <unk>.
Gross proceeds of two auto Tech were 498 million before deducting the underwriting discount and offering expenses.
Use the net proceeds some cash and borrowings under our revolver to completely pay off.
220 million and balance of Holdco notes and.
And to for under 20 million outstanding of Opco notes as a reminder, the Holdco notes carried an interest rate of eight and a quarter and the Opco notes interest rate was six and a quarter.
Post the IPO closing pro forma net leverage was reduced to 339 times.
Now as we move forward, we're actively engaged and the process to refinance our existing term loan facilities.
We expect to take advantage of a lower leverage position recent upgrades by S&P, and Moody's and our strong business outlook to lower our cost of borrowings.
We do not have any details to share yet.
But we will communicate them once the final transaction is complete.
Moving on to slide eight.
Now, let's quickly review, our 2021 guidance.
As Jeff mentioned before we expect 'twenty to 'twenty, one to be a year of strong organic chemistry revenue growth in both segments.
Our expectation is.
And that this will also result in double digit EBITDA growth.
Total organic revenue is expected to grow 10% to 12% in 2021.
Led by strong organic chemistry growth and double digit equipment growth.
Organic chemistry revenue a key performance indicator.
As expected to be up 8% to 9% for the full year.
Electronics is expected to be up about 6% to 7% on broad base secular strength.
And she is anticipated to.
And to increase approximately 11% driven by strong global automotive markets and the low base in 2020.
Adjusted EBITDA forecast is forecasted to be and the range of $405 million to $425 million, representing an increase of 14% over 2020 at the midpoint.
This adjusted EBITDA guidance reflects leverage on organic chemistry growth.
And if it's of operational improvement as well as some FX translation gains, which we expect and the first quarter 2020.
Capex is expected to be between four and off and 5% of total sales in 2021.
With about $10 million of this investments triggered by the build out for our new Mexican manufacturing facility.
Normalized interest expense is anticipated to be between 70 and $74 million for the year.
This is based on our new capital structure, but does not include a refinancing refinancing activities.
Please note that the refinancing will trigger roughly $61 million and onetime costs connected with early liquidation of our Holdco and Opco notes.
And as well as financing fee amortization, all of which will be recognized and 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 around 13% to 31%.
This rate needs to be applied to operating profit.
Other words, please exclude the EBITDA adjustments and particular transactional expenses for <unk>.
Structuring programs and non cash adjustments as well as interest expense from earnings when you use this guidance as.
As a reminder.
We do not have a meaningful tax shield on interest expense and interest is therefore for this purpose excluded from taxable income.
With respect to the first quarter we.
We expect organic chemistry revenue to be in the low double digits and for.
Adjusted EBITDA growth to be before the positive impact of FX translation and the.
And mid to high teens, whereas as the first quarter of 2020.
With that.
Allow me to hand back over to chip.
Thank you very much.
As Peter Hecht line with forecasting good revenue and earnings growth in 2020. One we have the right technology to address advanced semiconductor packaging. The high density PCB market and the rapidly changing requirements connected sustainable processes in place and we believe these secular trends combined with a strong cyclical recovery.
Endemic coaches and a great position for 2021 with that and I suggest that we now take some questions for my listeners and after that and I'll make some final comments operator, we're now ready to open the line for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad. As a reminder, we kindly ask that you limit yourself to one question with a follow up we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of John Mcnulty from BMO capital markets.
Yeah. Good morning, Thanks for taking my question and congratulations on a great set of results and guide just right out of other box.
So I guess the first question I had was regarding cash flows as we look to 2021, you're you ended the year really strong and 2020 I guess are there when you think about like the working capital side of things should we be thinking about in general that moving with sales as we look through through 2020 one.
In terms of in terms of kind of the magnitude of change there or are there. Other levers you can pull to either squeeze out cash or is there anything we should be thinking about about the new facility in China, I guess, how should we be thinking about like the working capital outlook as we look to 2020 one.
Thanks, John for the question.
In fact, we had a great.
Improvement in 2020 in terms of operating working capital.
We expect to keep this and.
And very strong and efficient level going forward and.
And probably we grow along with our sales with these levels, but again I think it was a great achievement by the end of 2020.
And we're able to maintain these levels going forward.
Got it thanks Tom.
Sorry go ahead.
Not just in relative terms to sales.
Got it Okay. No. That's that's helpful. And then I guess just just in general when we look at your business in terms of in terms of seasonality <unk> was always a little bit lighter than the rest of the year I assume that's largely because of Chinese new year, I guess, how should we be thinking about that this year, both based on what's kind of going on with regard.
Chinese new year also with regard to like the semi issues that we're seeing with auto is like is there is there going to be a little bit of a difference in terms of sequencing.
And as we progressed through the year or how should we be thinking about that.
Well I think first of all we have the impact as you said from holidays, particularly Chinese new year at the beginning of the and electronics you have.
The.
New product cycles coming from major smartphone producers, which affect of course.
Demand for <unk>.
The first part of the year typically and the first quarters typically cuts for the fourth quarter.
Let me talk about 2021 of course, we need to look at the comp compared to 2020 and as.
As you know the second quarter in 2020 was particularly weak put in and <unk>.
And as a COVID-19 hits, divest and village and the second quarter.
So we will have a significant recovery expected in the second quarter 2021.
Great. Thanks, very much for the color.
Thank you.
Your next question comes from Karen <unk> from Credit Suisse.
Hi, good morning, and again, congratulations on your first quarters and public company.
I guess you just touch briefly on debt and John just asked something along these lines, but can you just speak to any impacts that you saw in January and February that resolved.
And the resulting from automotive production delays due to semiconductor shortages and.
If you view this impacting and we talked a little bit about the cadence I understand that <unk> is.
Sure.
<unk> comp, but do you see any of that demand now getting pushed out into the second half.
And particularly in like a little bit of a weaker <unk> and <unk> or is that just for the near term very near term temporary delay that youre expected to flow through and the second quarter as well. Thank you.
Thank you Karen.
The I'd say the other chip shortages, primarily affecting the global auto markets.
And for electronics for Us, it's and the related PCB business, and and GM assets more kind of surface, finishing related we think the shortage will probably reduce auto production and buy back 1 million units in Q1, and perhaps another quarter million or so in Q2, so it'll affect both quarters.
Based on the feedback we're getting from our customers whoever we think the shortage, which as you know it's driven by high demand will largely wash itself by the year and so our full year growth plans, which pizza touched on Egypt remain intact and that being said yeah. We think the shortage may put some type of capital and how fast high auto production.
Could possibly growth so we're watching it very closely but offsetting that as far as our Gms business is concerned as we're seeing good growth and other areas like cemetery, where you may recall.
And the automobile, it's only about half of <unk>.
And that business.
Great.
And then I guess on the equipment side, you had a very strong quarter within electronics, but there's still slight weakness within the <unk> equipment business and can you discuss the backlog that you have within the G and that business and just on a high level. How we should think about Incrementals chemistry sales in both electronics and GM math is your equipment and.
Solved at the OEM facilities. Thank you mentioned, some pull through demand and the second half and electronics due to the new equipment base. So any color you can give there would be appreciated.
Thanks.
So as we've integrated the gross and the backlog is mostly on the electronics side at the minute.
And that's because there's enough capacity in areas like plating and plastics for our Gms and some large equipment that was installed in 2019 going into 'twenty. So.
Most of the sales at the minute is Iran, and the orders and our electronics, which is very good going into and order book for the first half of 'twenty 'twenty, one and turned that electronics for Otis driven, particularly by semiconductor packaging unique late lines of selling particularly well because that's what's needed for production of high density interconnect and.
And we conduct a packaging so.
And the bulk of the orders going forward will be on the electronic side. However, we.
We're seeing good interest and some of our new GM as equipment such as line of Smart We've launched this and the last 12 months and.
And we're seeing strong interest and first scale sales starting to come through now in terms of chemistry, it's not easy to give a straightforward answer because when we sell a piece of equipment it might pull something for like $300000 of chemistry to gear up to almost $1 billion and so the mix makes a tremendous difference, but and virtually all cases and.
And the electronics side, we typically get some contracts and that come through along with the chemistry equipment that we sell.
But.
I can't be more specific in terms of the actual pull through on the average, but I hope that helps you can.
Yeah, No that's great. Thank you and congratulations again.
Thank you very much.
Your next question comes from David Begleiter from Deutsche Bank.
Thank you Jeff on that same line of questioning can you quantify the impact in Q1 do you think from the auto.
Lower auto production.
Okay.
Yeah, and I think as I said, but it will be a million units so something in terms of auto.
And if it's.
Affect us by Epicentral to possibly on Gms business and the first quarter, but that still gives us very healthy growth about in double digits sorry.
So it's not really material to us and we think even with that loss will be picked up going into the second quarter and certainly by the end of the year.
Thank you and Peter just on the cost side can you discuss any cost the headwinds and tailwind you're seeing and 21 versus 'twenty.
And I E and incentive comp for some temporary costs are coming back into the business. Thank you.
Yeah David.
As he said earlier.
And we face is the typical inflationary impacts and.
And 2021, when our wage inflation is kicking in again.
And we had some cost containment activities, which might not repeat itself and we started some growth initiatives.
We.
Ramped up our <unk>.
And development facility.
And so there's a second Chinese chemistry plant.
Being said that we still believe that a major part of the additional margin is being converted into profit and this gives us a nice improvement in 2021.
Thank you.
Thank you.
Your next question comes from Josh Spector from UBS.
Yeah, Hey, guys. Thanks for taking my question and congrats again on line and the achievement here.
And just broadly on the margin side again and kind of a follow up to a prior question I guess.
Look at the incremental EBITDA into 2021 on your organic guidance you know the margin there is around 50 per cent almost when I include FX, it's kind of in the mid thirties.
I guess, what do you consider normal is 2021 and normal EBITDA leverage that you're seeing or what do you think that there is something different that we should expect Lord and medium term longer term.
Overall, we.
I think it's important to look at our margin mix debt.
We have for very strong margin.
Margin on the chemistry side of close to 60%.
And we converted nicely too.
The assumption is and.
We have shown that.
And we're able to offset wage inflation every year by sustainable cost measures.
And I see that all the valid going forward, we might invest part of the incremental EBITDA into growth initiatives, which we do in 2021, we might stool going forward.
But still this gives you a nice leverage and a nice conversion of our margins into EBITDA.
Okay. Thanks, and just on free cash flow I mean, you were pretty clear and your tax guidance in terms of how to treat that and put that on operating income I guess in light of your view of refinancing.
I know you can't give a specific number but how much room is there to improve on that over the next year and how meaningful could that be to a free cash flow pound person and what youre expecting now.
While our current term loan has a 300 basis points plus label and a 100% and it.
Basis point floor.
And so it's virtually and running at 4%.
And with a when you look at our lower leverage and the reason the upgrades we received.
S&P and Moody's.
And I just expect that we are able to shave off a decent amount of debt levels, which you just said and.
And.
Can build in some way efficiency into our capital structure.
As soon as I, if someone news and we completed a contract transaction and we'll let you know.
But I guess, if I could just try to clarify is just so in terms of the tax rate. So it and the cash taxes would refinancing benefit that or is there something structural which wouldn't have an impact there.
Oh.
Well, we don't have much tax shield on the interest so there's a limited impact on and Texas.
Okay. Thank you.
Thank you.
Your next question comes from Jeff Zekauskas from J P. Morgan.
Thanks very much.
You had very very nice revenue growth and the fourth quarter and your businesses and in describing and you said if you adjust for palladium and product mix compensation EBITDA margin was largely unchanged.
Why wasn't it higher.
Was there some negative pricing effects or or what helped the town why are your incremental returns. The same this year average returns.
Yes.
Jeff as you said, we grew 5% organically with our chemistry business on the on and organic level.
We also were able to improve.
Good day by 5% embedded here is the increase of the compensation accrual.
And in the fourth quarter, which related to the full year and.
And which had a negative impact if you take that out the <unk>.
Increase in profit would have been higher.
Okay. So then as my follow up do you have a target for.
Your normalized EBITDA margin that is do you think and three years, it will be the same or lower or higher or higher by how much lower by how much.
Assuming assuming you hit your revenue targets.
Yeah, I think first of all just a reminder debt.
And if we see increasing palladium prices, you will see some kind of dilution.
And excluding that.
Yes, if I exclude debt.
We convert them.
And the.
Growth into into profit and this will lead to improved margins over time.
Great. Thank you so much thank.
Thank you.
Your next question comes from P. J <unk> from Citi.
Yes, hi, good morning.
And I should say good afternoon, and good morning, Judy and good evening Jeff.
On the fiber rollout.
And that's going to benefit you both from.
And from the handset side and the fiber infrastructure side, what innings would you say youre in and this fiber rollout and how much benefit.
Can continue in 2020 two and beyond.
P. J. Thank you for the question I would say that so we've got a tailwind of several years and infrastructure, it's well advanced and China with another two years to go with some infrastructure build outs and still starting in America and of course and Europe and this is before.
For sub.
Sub six millimeter wave stops to be installed as well, which gives us some.
The momentum beyond debt in terms of five G rollout.
And we're looking at about 20% of the handsets that are sold today will be five G and debt.
The increase to about 80% current forecast by 2024. So we've got about three years of increasing <unk> penetration and handsets and as I mentioned earlier. It does provide a good tailwind for us because it's the increasing complexity and extra layers that are required on these high frequency boards and the penetration.
And of new semiconductor packaging technology wafer level packaging as well so the combined effect of that is we get about 50% more and a five <unk> compared to an average for G. Zone. So are we going to see the continued effect of this I think until 2020 for at least.
Great and just related to that another question.
How much share. It again do you have in five and she wishes for Jay and then I'm sure. Your competition is not standing still and they are innovating as well. So can you talk about your competitive dynamic and sort of Oh why that favorite issue. Thank you.
Certainly we made the decision several years ago to concentrate our R&D, particularly on the packaging space.
Driven by the decision that does more slow was running up to speed on the wafer.
Density would have to move to chip clips and the packaging and so it just proved and.
So for the last five years, or so with particularly been concentrating on putting outcome strength towards the fine lines and spaces that are required, particularly for the interpose on.
On which these chips and that's it.
And then package to get high density and the overall.
Integrated package. So this is a complex chemistry it required multiple years of qualifications with the Oems. It also requires some new equipment, which is why as I referred to earlier unit pipelines are selling particularly well.
So I think a competitive advantage here is OEM qualifications, we a plan of record with a very strong position and this particular area.
Have a good equipment sales good chemistry, followed through in this area and.
And really strong customer support and technical service support and those areas, which are important for production, particularly greater China. So I think that is for summary of our competitive advantage.
Thank you wait and watch.
Thank you.
Your next question comes from Laurence Alexander from Jefferies.
And just a couple of things first can you give a sense by your key businesses for the electronics automotive and and the other industrial.
Degree of actual visibility you have.
And how quickly you see inflections and demand or and order rates.
And then secondly, when you build new plants for example, the new Chinese capacity, how long does it normally take to fill out for plants.
Thank you Lance in terms of visibility.
It's variable and particularly at the minute because our customers and not always able to give us the amount of impact for example, and the semiconductor shortages.
We have Sep 14, and factories operating around the world and the reason we have been close to our customers is because in many cases, we can do same day delivery or suddenly same week delivery. So we worked closely with the customers and have pretty good visibility about four to six weeks ahead on actual demand.
And this is also augmented because in many cases for supporting and maintaining the bumps for our customers on the electronic side because of the longer lead times on semiconductors, and particularly on the front end for the work we get much better visibility in the region of one to two to three months, depending on the actual process.
In terms of manufacturing and our ability to scale up we have plenty of capacity and the factories.
As I mentioned with augmented this with our new factory in China, and we're building and do you want and Mexico.
When we need additional capacity, we can add and general extra shifts.
And we're not currently impacted by many raw material shortages, although it's getting a little bit tighter and one or two areas and so.
We're not too worried about for the capacity of our factories and they also fungible and the sense that.
If we did have a problem with one.
St products are often qualified at different factories. So we can move product line.
And I guess, maybe if you wouldn't mind elaborating the.
My impression was that capacity utilization is kind of a law.
Less useful metric.
And for your business because of the way the claims work.
So when you decide to add new capacity for example, their planes and China is it new functionality or new product lines that are tied to a particular industry or <unk>.
New skill sets that you're importing into a region I mean can you just characterize what's the point too.
Thank you yes.
Yeah, I'd be happy to line, Thank you and when.
We made the decision to bring young Joe we had enough capacity at Guangzhou plant and the size. We were however, worried but for one of our largest sales areas, we'd only got one plant.
So on grounds of redundancy initially we decided that we would build and.
And extra plumbed up and case.
The environmental regulations or local restrictions.
Pressure on us the plant and the site. So we went ahead and over the last for five years, we've completed the plant and young Joe now that we have we are accelerating the qualification with customers because the capacity is needed at both because of growth of customers and the Shanghai region, which was strong for us.
But also because corona virus regulations at the minute and meaning that we can't do multiple and deliveries for example from a debt.
The delivery trucks out of the factor and the sales they have to make the point to point deliveries, which is limiting our ability and.
And some and some particular areas so.
It's really a matter of redundancy plus local service.
And China being such a massive country. We wanted to have a factory very close to our emerging new customer base and the Shanghai Delta region.
Great. Thanks.
Your next question comes from Duffy Fischer from Barclays.
Yes, good morning.
First question is can you just tell us what the new net debt number is pro forma for the IPO and and and your comment where you said youre going to pay down about a half turn.
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Net debt ratio per year based on free cash flow and the math of that would say youre going to convert and one half of your EBITDA to free cash is that a valid number as well.
So let.
Let me check.
See where that gets to give you the net debt number again I think that the leverage.
By the time of IPO with 385.
I need to pull out the net debt number the final net debt number and.
Provide that to.
See you later on.
Okay.
Fair enough, but the 50% conversion of EBITDA to free cash flow is that a fair number.
If you take if you took the adjusted free cash flow as we have defined it in the India attachment.
C. A 60 conversion and 60% conversion of for adjusted EBITDA into free cash flow.
Okay, and then off your guided adjusted EBITDA number what's the DNA that's embedded in that number for this year.
I think it's the ongoing.
Depreciation and amortization excluding.
The other.
Extra audience and write offs.
Last year.
And thrown down to 80 million, but again I think.
And if you go into our 20-F.
You see the numbers excluding the.
Yeah.
And Oh, we have taken last year.
I'm just and in your guidance of 405 to 425, I'm, just trying to understand what's the embedded and DNA and that number.
It does.
EBITDA, excluding depreciation and amortization.
And what I'm, what I'm trying to get to is what is EBIT. It. So if you give us guidance for a five to $4 25, I just wanted to understand what's the embedded DNA number that's in that.
I think if you if you take the Chester.
Just a reference to 2020 excludes the extraordinary write off.
And that there might be some ethics effect.
<unk> seen and.
2021, but probably but then you come pretty close for the number.
When you calculate that and what do you mean.
Need to know for Ya reconciliation.
Okay. Thank you guys.
Thank you Duffy.
Your next question comes from Ben <unk> from.
And from Baird.
Great. Thank you guys.
Congrats again.
First quarter Roe.
Maybe can we just touch on on the.
The opportunity.
Uh huh.
And sustainability.
For group it like that debt.
Maybe just on the.
On the auto side.
Opportunity there for both white, where you.
Yeah.
Higher electronic components.
For for your call.
And you know if you could give dollar terms for the income data.
Data about who youre talking to or where those conversations are going that would be great. Thank you very much.
Thank you Ben Yeah I'm sustainability.
You will be hearing a lot more force by the way because obviously until a month ago, we were a private company and we will not be putting that slips and sustainability reports and I were a public company and upgrading our communication and this area in terms of sustainability and all tariff I understand what you're doing but what your question.
Seeing generally about 30% improvement dramatic tech sale.
As we move towards hybridization and hybrid vehicles and electric vehicles, that's driven a lot by the electric components, but it's also driven by things like light weighting, where we're getting increased sales as things like platelet plastics ibs components, but would have been and I'll put it.
Metal before.
We're seeing good improvements and some battery and placing technologies that we have available.
And we're seeing some good improvements and some premium amortization.
Is the chrome and the interior and exterior.
He is coming along nicely and differentiating some electric vehicles. So overall, we see a total of 30% tailwind as we move into this area and it helps us on several other areas on the electric and electrification as well.
Great. Thank you.
Thank you Ben.
Your final question comes from Arun Viswanathan from RBC capital markets.
Great. Thanks for taking my question and congrats on the results.
I guess the first question I had was you know obviously, we're early in the year and.
So it's a it's expected to provide a range but.
Maybe you can just kind of give us some factors that would push you to the.
Upper or lower end of the guidance range for the full year for O five mm what's embedded in the for a five and kind of what's embedded in the for 25.
Yes.
Thanks, everyone for for the question and so overall.
We believe that.
Debt opportunities to outperform the market if the market remains constructive.
Again, I think it's a matter of volumes at the first place.
And we see strong volume growth.
At the first part of the year and we were more cautious and the second part of for you.
But also the second part is that we might be able to outperform.
Costs do not come back to our business as fast as we have modeled it.
And this relates to one extent to travel web features planned for third and a certain travel budget.
For the travel restrictions and we might need to see when they're being lifted and when cost comes back to the business and lastly, I think just to mention we also see on the interest side as I indicated through the refinancing and opportunity to improve our efficiency and reduce the interest expense.
Going forward. So I think that's three areas, where we see.
Ourselves.
To have some opportunity in order to be able just to be in the upper end of the range.
Okay and.
And then thanks for that and then on the leverage.
And now you're below four turns and so you know.
And you've indicated that you'll likely.
B and a position to delever about half a turn a year.
And so yeah, maybe you can just.
Reiterate what you think the target leverages for the business.
And what you will do.
With cash.
To get there and then I'm sorry, he wants and what you'll do with the cash out once you get there. Thanks.
Thanks, everyone and again I think a clear commitment and our site is to delever as fast as possible.
We've shown in the past.
We're able to deliver around a half a turn every year with the strong growth and profit improvements. We expect in 2021, we're able to convert that into additional cash as well so there'll be close too.
Nearing three times leverage by the end of the year.
And.
On the capital allocation rules and nothing has changed our real focus is on supporting the organic business and delever and and midterm having.
Some small bolt on acquisitions as we have communicated that I think that's the capex allocation rules, we have set ourselves.
They're very much remain and Texas.
Okay, great. Thanks, a lot.
Thank you.
And there are no further questions at this time I will now turn the call back to Mr. Geoff Wild for any closing remarks.
Well, thank you operator, and I'd like to thank everybody for the questions today, we've got to close the Kohl's. The interest we're running out of time, but to finish I'd reiterate a few key points from this call. Our electronics business has grown for late 2020 and is poised to continue growing the secular trends like <unk> infrastructure <unk> smartphones for the replacement cycles and <unk>.
Growth and IC substrates and semi packaging and accelerate.
Leading technology and comprehensive solutions are key enablers and the electronics value chain. So that is gms market, so quickly improving and our focus on delivering sustainability and labeling solutions will offer us a multiyear tailwind together these secular trends not only provided a constructive backdrop and the fourth quarter. They also presents a multiyear.
Our opportunity to grow our business expand share and deliver strong returns to our shareholders and finally.
Say to our teams around the world I'd like to say, thank you for continuing to stay safe and sustained focused on our customers your dedication and flexibility have enabled us to manage successfully through the pandemic become a public company and positioned us very well for the future I expect our hard work to pay strong dividends as we move forward.
So thank you all for being on the call today, and we look forward to speaking with you again, that's our next call operator that ends the session. Thank you.
Ladies and gentlemen. This concludes today's conference. We thank you for your participation you may now all disconnect.
Oh.
And again.
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Uh huh.
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