Q2 2021 Atotech Ltd Earnings Call

[music].

Good morning, and welcome to other Teck's second quarter of 2021 earnings Conference call. Today's speakers on just wild on the text Chief Executive Officer, Peter Feld Nicked Auto techs.

Chief Financial Officer, and Sarah spray the head of Investor Relations. After the Speakers' remarks, there'll be a question and answer period to ask a question you will need to press star one on your telephone.

We kind of ask that you limit yourself to one question and one follow up.

As a reminder, this conference call is being recorded and your participation implies your consent to our recording this call. If you do not agree with these terms. Please disconnect now thank you of and.

Now I'd like to turn the call over to Mr. Bray. Please go ahead.

Thank you Catherine good morning, everyone and thank you for joining us.

First quarter 2021 earnings call.

A replay of this webcast will be available on our website for six months. Please note that alphatec provides non ISR of information and reconciliations between the <unk>.

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 of after tax of by referring to our 20-F filings for a list of factors that could cause our results to differ from those anticipated in any forward looking statement we under.

No obligation to publicly update or revise any forward looking statements, except as required by law.

Please note that when we come to the Q&A at the end of this call we will not be taking any questions relating to the MKS transaction. We ask that you limit your questions to aspects of our second quarter, only and with that I will turn the call over to Jeff.

Thank you Sarah good morning, everyone and welcome to our second quarter of 2021 conference call.

And all of a second quarter was of public company. We are pleased to present, an excellent set of results as you'll remember from a global perspective, Q2, 2020 was the quarter most affected by the pandemic lockdowns.

Therefore, as we look at our Q2 results now and further into our outlook for the rest of the year you will see the effect of the recovery from Q2, 2020 trough as well as the tempering of those very high growth rates as we move into the second half.

In the second quarter, we experienced organic growth of 9% for our electronics chemistry. This is a strong result for a second quarter in particular when you consider the by Q2 last year, China had already begun to recover from the pandemic. Thus the demand we experienced is primarily driven by <unk>.

Killer trends in which we continue to participate, especially <unk> and millimeter wave as well as advanced semiconductor packaging.

Some of these growth drivers was stronger than expected in Q2, and we believe they will support us well into the future. For example, we had previously expected, but the work from home trends would start to abate in the second quarter of 2021, but the arrival of the Delta variant of COVID-19 meant the work from home driven compete.

The demand continues to be strong, particularly in Asia and.

In addition, the never ending search for more server capacity and greater data volumes continued to drive computer demand and therefore of customers' demand for our products.

No. It's pizza will review later the record order levels for electronics equipment. We saw in the first quarter of 2021 translated into very high levels of equipment revenue and as always these equipment sales of supportive of sustainable future of chemistry revenues.

In quarter, two last year of general metal, finishing segment experienced a deep trough in demand as a result of the pandemic the rebound from which is clearly visible in the 59% organic revenue growth in chemistry.

The auto production worldwide remains below typical trends due to the well known semiconductor shortages, our strong presence in China and differentiated offering helped us to grow ahead of the overall market.

Our strong revenue growth coupled with the operating leverage inherent in our business model provided us with of 63% increase in adjusted EBIT of the two.

For a record result of $118 million, we generated adjusted free cash flow from operations of $86 million returning to a very strong conversion rate from adjusted EBITDA. As a result, we ended the quarter with net leverage of three two times EBITDA. So we are well on track towards our targeted capital structure.

Sure.

In this past quarter, we experienced a surge in demand for our sustainability related products in both Gms and the electronics segment.

<unk> is uniquely well positioned to meet this demand given of our decades of focus and investment on sustainable placing solutions.

For example on coverage on pretreatment process for decorative plating is currently now up and running with two customers and in qualification with a further 15 customers our revolutionary patent pending <unk> solution is the world's first PFS free missed the present and with it we are in the unique position to help read.

Defined the environmental footprint of the plating industry.

I'd like to close with an update on our digitalization of activities. The addition of software to our integrated offering as of further differentiator and I'm very pleased to announce that we have signed our first contract with a high in the industry partner to implement an innovative combination of Iot solutions and hardware optimization of <unk>.

<unk> will enable our customer to reduce overall energy consumption and meet the climate related goals.

Although today the percentage of revenues from our sustainability products is relatively small as the tech is the leader with a broad portfolio of products offering tangible benefits to our customers in terms of reducing the environmental footprint of their activities.

Now before I hand, the presentation over to Peter I'd be remiss, if I didn't mention the acquisition agreement with MKS instruments as of July of the first the board of Alphatec reached an agreement to join with MKS for a total equity value of $5.1 billion.

<unk> is the global leader of instrument as a global leader of instrument systems and process control solutions. The measure monitor power uncontrolled critical parameters of advanced manufacturing processes, especially semiconductors similar to alphatec. They have a strong focus on technology and our customer solutions of complement.

Free for key advanced electronics markets.

The regulatory approval process for the merger is underway and the transaction is expected to close in the fourth quarter of 2021, we expect the joining with MKS will provide additional opportunities for collaboration innovation and continued groundbreaking solutions.

And with that I'd like to hand, it over to Chief Financial Officer, Peter for overnight for a.

The review of our financial results after which we will take questions and please note of Sarah mentioned, we can't address questions pertaining to the MKS acquisition of today. So please we would be grateful if you could please limit your questions to the subject of our quarterly results Peter.

Thank you Jeff.

Good morning, everyone.

I'm very excited to review our Q2 as we achieved record financial results and continue to grow ahead of our end markets.

Let's start on slide four.

For the second quarter, our total revenue of $377 million, an increase of 44% over the prior year included including organic revenue growth for chemistry, and the equipment of 32%.

As an FX tailwind of 9% and the.

3% benefit from the Palladium pass throughs.

Palladium price continued to rise and current.

<unk> 7 million two of top line, while the weaker U S dollar positively impacted our sales of $24 million.

The key secular trends, which Jeff highlighted.

The remainder of the principal drivers behind our strong revenue growth.

To a large degree the high growth rates seen at it.

Tms are a result of the recovery from last year's quarter, which were heavily affected by the COVID-19 related plant shutdowns, which I will address but I will address our two segments in detail.

On the latest line.

Looking into our profitability you can see the quality of our gross margin the high operating leverage inherent in our business model as we increased our adjusted EBITDA of 63% compared to the second quarter in 2020, adding.

Adding 370 basis points towards adjusted EBITDA margin.

It's worth noting that our margin of 31% leads the industry the spread.

The <unk>.

Negative product mix effect from higher equipment sales as well as the dilution from the pass through of higher palladium prices.

Similar to the first quarter of 2002 to 2021 Q2 was also affected the supply chain disruption elevated.

Elevated freight expenses and material inflation however.

The anticipated in May.

We're able to keep the impact on our gross margin to below 2% of sales.

Looking ahead to the third quarter 2021.

Although higher freight costs to begin to abate, we anticipate that the raw material costs will continue to be elevated.

To counter this effect, we continue to work on procurement efficiency.

On the system cost increases to our customers.

Diluted earnings per share was 15% for the second quarter, you can see the profound effect of analyzing the quarter's most affected by the COVID-19 pandemic and the recovery was the loss of $3.47 in the second quarter of 2020.

As announced in May we are now publishing an adjusted EPS, we have taken the same adjustments for adjusted EBITDA with the addition of the elimination of the amortization expense.

Coming from the increase in book value associated with the acquisition of the callout.

The adjusted EPS is pro forma for the prior year period based on the same number of shares as we head into the second quarter of.

2021.

2021 adjusted EPS was <unk> 29 per share and here too you can see the effect of the rebound in our strong operating leverage.

You will find the detailed explanation of the adjustments in the appendix slides of this presentation.

Going forward, we will apply the same adjustments, which we believe percent accurate view of our earnings capacity.

And let's go to slide five for a deeper look into the electronics results.

Our performance in electronics continued to be very strong in the second quarter for total revenue of $248 million increased 33% year over year.

This result included organic growth of 21% of favorable palladium impact of 4% and an 8% benefit from FX translation.

Organic growth came at the revenue for electronics was 9% in the quarter underpinned by the strong growth in the smartphone market as well of sustained growth for <unk>.

High performance PCB and semiconductor related businesses.

As mentioned in May of this growth has been anticipated and we are pleased to see it unfold.

Please keep in mind.

The 2020 saw some shifts in typical seasonality.

The work from home created stronger demand for laptops in the third quarter and.

And the well known OEM shifted its product launch pattern into the fourth quarter.

As we lap this quarter the base effect caused mathematically lower growth rates compared to what we reported in the first half of 2021.

Electronic equipment sales enjoyed another outstanding quarter with organic revenue up 115% the day.

The main stem from the sources, we have outlined previously.

The full transition to five <unk> for the smartphone manufacturers.

The high demand for computing.

Our next generation machines on high demand as Oems in PCB manufacturers seek to meet consumer demand.

Electronics generated $85 million of adjusted EBITDA in the quarter.

$23 million 36 per.

<unk> improvement over the prior year period, primarily driven by the strong organic volume growth now of lean cost structure.

Margin was 34, 3% in the quarter up 20 basis points, which is the reflection of the robust organic volume growth, partially offset the product mix effects from higher equipment sales.

Palladium pad III.

Yeah.

Moving to slide six now.

<unk> total revenue grew 71% to $129 million in the second quarter comprised of organic growth of 59% of 1% positive impact from Palladium net.

And the 11% tailwind from FX.

From a mixed perspective chemists revenues grew organically at 59% and equipment revenue rose 48% of the from a low base.

It's just that this rebound is partly a reflection of generalization of the quarters heavily affected by the COVID-19 pandemic.

But you also observed the high end automobile and construction applications was stronger than expected.

Automotive producers are still operating below full capacity due to the semiconductor shortage, but the demand environment is intact.

So we believe that demand is simply being pushed out possibly even into 2022.

In the meantime, where all of the experiencing promising project wins outside of the auto market and strong demand for our sustainability focus solutions.

As Jeff touched earlier on open up an earlier, we have seen an increase in interest for.

The sustainability related product.

The CFO.

Worth, noting that our preparation to meet this opportunity risk on many years of development and investment for.

For example, the cumulative spend on R&D for the covered from system.

Has been nearly $20 million spread over more than a decade.

As we look to earnings GFS, adjusted EBITDA at $33 million in the quarter and Thea tested margin was 25, 8%.

The growth in adjusted EBITDA reflects our strong operating leverage partially offset for the higher freight expenses as a result of the well known supply chain disruptions and dimension tire material inflation.

The recovery of the adjusted EBITDA margin to 25, 8%.

Thanks to similar effect.

Worth noting.

We are now back on the path to normalized margins.

Let's now move to slide seven.

We generate strong free cash flow of $86 million for debt service returning to adjusted cash flow conversion rate more in line with our long term target of greater than 60%.

The strong cash flow was also a function of our efficient working capital management with working capital at 16% of revenues in the second quarter.

As well as our efficient capex, which was 2% of revenue.

Please note that we are typically the seasonality to our capex the maturity coming into the second half of the year the <unk>.

As of the spend as a percentage of revenue was lower than our full year guidance, we are fully aligned with our internal expectation.

As a result at quarter end were 245 million of cash net.

Revolving credit facility of $233 million available so in total of liquidity of $478 million.

Cash repatriation at the holding level of proceeding as planned.

Putting our balance sheet efficiency and financial flexibility.

Particularly when it comes to investing for future growth.

Our net leverage improved to three two times, a significant improvement versus the three seven times the level at the end of the first quarter 2021.

This is partially due to our cash generation and also supported by the end of organization the quarters of 2020, which were affected by Covid.

That said, taking our expected cash flows we should further improve our net leverage by the end of 2021 will be well on on our way towards targeted capital structure of two to three times net leverage.

Moving on to slide eight.

Turning to our guidance I'm pleased that our strong Q2 performance and the support for underlying demand trends allow us to once again raise our guidance range.

The beginning of 2021, we expected of growth range of 10% to 12% for total revenue.

Having raising raised that expected range of Mei.

We're raising it yet again to 13% to 14%.

As I mentioned earlier, please keep in mind that moving into the second half of the year, we start to lap some extremely strong quarter and particularly the fourth quarter 2020.

Coming to our key performance indicator.

Of organic revenue growth in the chemistry.

Increased expectations for electronic chemistry to 7% to 8%.

It moved the expectations for <unk>.

The high end of the range of 12% to 13%.

This allows the forecast of approximately 10% and organic chemistry revenue growth.

One percentage point more compared to our previous guidance.

We take we take our adjusted EBITDA guidance for the full year from between four <unk> to $435 million to a range of $435 million to $450 million.

Adding to the mid point, an additional three percentage points of growth.

This now represents 20% earnings growth for the full year and reflects our confidence in our revenue growth potential as well as our cost discipline and operational improvements.

Underlying assumptions for our guidance on the same is noted on the slide.

Our capex guidance remains unchanged at approximately four 5% to 5% of total sales in 2021.

We are in line with our full year expectation on major investments are focused on our new Mexican facility digitalization initiatives.

And the specific project.

As we communicated to you made our guidance for interest expenses already anticipated the refinancing activities.

Before we confirm that the range for normalized interest expense is anticipated.

To be between 70 and $74 million for the year.

This is based on our new capital structure and does not include one time costs related to our refinancing activity.

Finally, our.

Income tax rate, which includes income and withholding taxes should be unchanged at around 30% to 31% for it.

Adjusted operating profit.

Looking forward to the third quarter of 2021, and keeping the effects of pandemic recovery in mind.

The comprehend and expecting organic total revenue growth and adjusted EBITDA growth in the high single digit growth range range with that I think we can open the floor for questions operator.

Yeah.

Thank you as a reminder.

If you would like to ask a question press. The Star then the one key on your Touchtone telephone to withdraw your question press the pound key.

The first question comes from John Spector with UBS. Your line is open.

Hey, guys. This is Josh Josh Spector.

So.

Just curious if you could provide some granularity on the sequential sales change in EBITDA change in electronics. So you know chemistry sales on the only up around 6 million I assume a decent portion of that is the metals, but EBITDA was up $9 million.

So we haven't heard about cost decreasing sequentially across the space much at all.

So I'm curious of what was the driver of the increase in EBITDA sequentially for electronics.

Josh Thanks for let me just take this question for the first of all the nicely converted our crews into into profit.

Maintain pricing stability at a good mix effects in addition of.

We continued to run of very lean cost structure than initially expected expected cost increases didn't materialize. So in other words, we haven't had much trouble expenses and the.

We were able to continue to drive the cost measures. We had initially planned.

Okay.

Thanks for that.

Yeah, No that's helpful and I guess just.

Taking broadly on your strategy you guys have been pretty clear about your equipment plus chemistry driving the strategy.

Combination of MKS side for their drive that and not asking you to specifically comment on home care side, but just thinking generally when you go to win new business on electronics.

How often are other ancillary equipment providers involved in that conversation when you're trying to get back into that additional application is that something that that's common or unique or could you just kind of characterize how that develops.

Yes, Thanks, I think at the.

Lower and there is usually some competition of its generic plating equipment a lot of our sales have been for areas like unit plate, which is of the leading edge of semiconductor packaging and the sales have been predominantly in those areas and particularly in Asia sales.

Sales have been driven by two factors one is the the unit plate gives a lot of environmental advantages to our customers like the reduction in wastewater treatment and costs, but secondly, it enables the.

The customer to use the advanced plating chemistry and meet the very fine line on space requirements that are inherent in the advanced semiconductor packaging, so that and there is.

We have very high market share.

There is less opportunity for other other suppliers of equipment to come in and on compete which is why we have of very high percentage of chemistry and equipment mix.

That part of the market I hope that clarifies Josh.

Yes. Thank you.

Thank you our next question comes from.

Steve Byrne with.

Bank of America. Your line is open.

Yes. Thank you I'd be really curious to hear your view on.

What you are expecting trends in the auto use of metallic coatings to go to from here.

Is that of trend.

That you expect to increase or decrease from here and perhaps the depends on the region of the world the price of the vehicle.

Where on the vehicle interior exterior.

And ice versus EV, if you could the.

Comment on guidance.

You can appreciate that.

Thank you.

In general we see more use of metallic coatings that the higher end of the market.

Because of the attractive finishes of things like shutting in chrome, which provide a good of luxury is finished to the automobiles. So we'd do better at that end of the market. We are also seeing more metallic coatings.

In areas, where the vehicle needs of light weighting as we moved from hybrid into EV electronic vehicles for.

For example.

Ponant that might've been metal in the past are now becoming plastic coated coated.

The components due to light weighting and that increases the metal content as well in general we're expecting about 30% more chemistry.

On EV versus I C E and Thats driven by the number of fasteners on connectors and electronic.

Additive components as well as the surface, finishing that we're involved with so.

Theres a general good trend towards increased medicalization of particularly at the premium end of the market.

Yeah.

And Jeff you mentioned the us.

The PFS from the suppressant.

For the bedroom.

The question about your legacy in the suppressants.

What what would be your revenues from these.

Mhm.

Products the do contain piece for us.

And maybe more specifically is the the unit operations up there used in by your customer does it generate wastewater.

I can't give you the precise percentage of the minute on.

We've been helping the customers with auxiliary equipment for wastewater treatment for some time, but just to be clear.

We have.

On strictly adhere to the Stockholm convention on the persistent organic pollutants and derive regulations. So we're not really responsible for the way that our customers handle.

On the treatment of the materials, but I'm very pleased that we're now able to move on to a really new range of missed suppressants, where none of these materials are required.

The one I mentioned in the text of the few Malaak solution.

Is the world's first PFS for <unk> mist suppressing the trend. We're currently therefore on track to eliminate all sales of materials containing short term pretty fast.

Which is being very well received by the customer basis, the seek to move to meet.

Upcoming regulations.

Thank you.

Yeah.

Thank you. Our next question comes from of ruin. This is one of them with RBC capital markets. Your line is open.

Great. Thanks for taking my question I guess I, just wanted to get a little bit more on the markets here. So.

Obviously, there is there's automotive exposure in <unk> and maybe that was some of the.

That drove some of the performance was that segment kind of below your expectations on similarly, and was it due to automotive and similarly.

In our <unk>.

You guys had a pretty robust quarter. There you talked about the cost, but just thinking about the demand.

The demand materialized, a little bit better and if so what would you highlight on on that front I know you've talked about COVID-19, but anything else. Thanks.

But on the start.

And for Jeff contributed to the.

Two of them later on.

So I guess again I think.

So a very nice rebound of the automotive business the.

Good growth rates all around in all the regions.

We saw that the China is performing very well, but we also see that the markets outside.

Outside of automotive.

Sure and good growth rates in the.

This was very encouraging and contributed nicely to the great performance of Chile of from the second quarter. When we look at electronics. We also saw that the the performance was better than we initially expected because many markets continued to grow strongly and it's a broad based growth we see strong growth in <unk>.

<unk>.

You also see that our.

Work from home driven.

Laptops Oh.

Computing.

The cloud services, the all of debt.

<unk> demand.

And even though on the smartphone cycle moved by a quarter.

As you know that one of the key Oems the moved the cycling from the fourth quarter and the.

Ending the second in the first quarter, we continued to see growth good growth rates and good demand in China. The all in all it's a broad based growth, which we benefited in the second quarter.

How are the only add I think we're seeing good drivers on the <unk> penetration.

The starting millimeter wave penetration.

You've seen upgrades by some of the major smartphone manufacturers in the outlook, which has come through into the supply chain, which has given us.

Better growth than expected and the better outlook as well for the second half of whom we expected ahead of their anticipated launch for the first quarter of next year.

Great. Thanks, and then just also just wanted to get your thoughts on the equipment business.

Somewhat unique you guys.

Are you seeing more orders there and does that give you visibility into next year.

As well thanks.

Yes the.

The still strong on equipment, we our factories are pretty much fully loaded now we're dealing with some supply chain shortages as well.

On some components.

And I think managing that quite nicely our factories in both Germany, and China of pretty much full up on we've got a good order book and visibility on which I think to the second half.

For the first for the end of the first half of next year. So it's mostly driven by electronics, mostly then driven by semiconductor packaging and HDI, but.

But we are starting to see some interesting inquiries as well for the Gms business, which we believe should recover next year as well.

Thanks.

Thank you. Our next question comes from David The luck.

True.

The tariff with Deutsche Bank. Your line is open.

Thank you good morning, Jeff and Peter just looking at Q4 guidance can you comment on the somewhat wide range. It looks like about the low end it could be down year over year, what package of it would cause Q for it to be down year over year.

Yeah.

Yes, I think.

We have pretty good visibility for the third quarter and the.

There are various factors driving the fourth quarter market trends.

If you look at our market estimations and the.

The key.

On marketing firms day.

C a R.

Probably a rather stable.

Slightly declining market for the automotive market in the fourth quarter, we believe that we outperformed the market but still.

The fourth quarter 2020, with the very strong automotive quarter.

We are not sure.

With the supply chain shortages.

The the trend is going to be on the electronic side. We continue despite the fact that as I said.

Well one of the key top Oems the started there.

The smartphone cycle in the fourth quarter, we continued to see strong demand we continue to see growth in electronics again, but the comps are getting a lot more difficult.

With the automotive market returns in the fourth quarter 2020.

And.

All of the electronics, particularly the smartphone market performing very very well in the fourth quarter last year. So again, we see debt with definitely performance debt level, but the growth rate.

Are dependent on various factors and the.

That's what we put into our forecast.

And just commenting on the first half for the quarter right. Now are you ahead of or in line or behind your your forecast for top line and EBITDA growth for Q3.

Well it is the guided you saw that we improved our guidance for the full year.

We mentioned over the last calls as well we were quite cautious.

Going into the year with.

C of strong confirmation of our growth trends, we see of strong confirmation of our approach at wins and.

With that we were able to increase the guidance for the full year.

The way, which is to increase.

The guidance for organic chemistry growth rate as well as the equip.

Equipment growth rate so all in all I think.

Yeah.

We're able to confirm a more optimistic view for the year.

Thank you.

Thank you.

Our next question comes from John Pitzer with Credit Suisse. Your line is open.

Good morning, guys. Congratulations on the strong vote of thanks for letting me ask the question Peter I apologize if I missed this but do you think about your total growth expectation for the full year on an organic basis can you help us kind of parse out how you're thinking about second half palladium pricing and FX impacts.

Well I think we applied the.

The FX rates as of June and simulated debt for the full year.

Again any change might also impact on all of or total numbers of forecast, but again to of please use the tune of fixed rates.

We applied them for the for the rest of the year.

On the growth rates, we continue to see good growth rates for our business. However, as I mentioned before the comps are getting more difficult.

The second half of the year the.

China returned to growth the June 2020, no other business, so you'll see that the comps are true.

<unk>.

But we also saw as I mentioned before the the automotive market returns.

Strongly in the fourth quarter last year all of that needs to be taken into account sales. We continue to see of very strong performance of our business. We continue to see good demand in automotive.

The continued demand strong demand.

For all of our latest technologies on smartphones and the.

Although in all the other areas.

And then Jeff as my follow up I'm wondering if you could just comment a little bit on the electronics equipment business.

And the prospects for sustainability I mean, how much of this do you think is cyclically motivated how much do you think the business is kind of structural share gain on your behalf and I guess as you answer the question I'd be curious as to whether or not you expect to see any impact from the chips. The act I think of lot of the people view that as helping rami on.

For the in semiconductor, but no I kind of get the sense that you're going to have to see some backend capacity perhaps.

My greatest the different geographies over time are you seen that yet and is that something that you expect to see in the future debt could sustain growth here.

Yes, we have.

We have started to see some of the equipment move outside traditional areas like China, We had some very good orders during the quarter for.

Some other areas of southeast Asia, with some new customers, it's being driven by advanced packaging, it's being driven as I mentioned by some sustainability requirements. It's being driven by addition of capacity, but also the wafer level fan out type of applications.

So we're seeing customers the because of those front end.

Our requirements on expansion, you're talking about now starting to add back end capacity in anticipation of that driven as well by tighter.

Requirements for areas like smartphone on fibre packaging I'm also pleased to see the penetration was always good at the leading smartphone manufacturers.

But as market share has been growing in China by some of the other smartphone manufacturers. We're starting to see this these packaging trends flow into those areas as well, which is also helping demand for.

<unk> equipment in the us the chemistry of that comes with it.

Thank you very much.

Thank you.

The next question comes from Ben <unk> with Baird. Your line is open.

Okay.

That's very true.

Could you talk about.

On the favorable loosen the momentum there.

The eight youre doing the battery.

Recycling as well.

Thank you bet.

On the sustainable solutions, we are seeing increasing.

Interest obviously from our customers, we have a broad range of auxiliary equipment.

But kind of help our customers with recycling and with reducing any wastewater emissions.

We are also as you may know, we've spent as Peter mentioned, a decade or more of research into moving from the chromium six to trivalent solutions.

And we've got about 17 customers now either using or actively of Bolton and evaluating the switch which has some major advantages in moving away from things like chromic acid into much safer promo alternatives around 57 percentage of R&D to day is designed towards sustainable solutions driven.

By this.

<unk> customer demand and I think it provides a healthy tailwind both for our equipment and for our chemistry business going out in the future of that's true both for the Gms business and for electronics on on your latter point.

We are not involved in battery recycling today, although we have commented in the past that we have a number in fact five different.

R&D projects ongoing to look at materials that will go into batteries.

Because it's a fertile area for surface, finishing solutions and the core competencies that we have.

In this area. So it's at RMT stage at the moment with the nothing really to talk about on battery recycling.

Thank you.

Yes.

Our next question comes from David Silver with C. L. King Your line is open.

Yeah, Hi.

One thing I noticed during the quarter was the sequential revenue trend by geography. So Asia was certainly up strongly but I think there were sequential declines in both Europe and the Americas and in particular I was curious about Europe, just given I think.

There would be a positive.

Positive currency effect on top of the underlying business trends. So maybe if he wouldn't mind commenting on the sequential.

Revenue declines outside of Asia.

Yeah.

Overall, we continue the again.

Yes.

We continue to see growth rates in all regions, we were able to grow.

There were some.

Specific country.

The focus topics, but overall, we continue to see of.

Growth rates both in Europe.

Well it's in.

In the U S. Please keep in mind debt the recovery was not as strong as anticipated the supply chain issues prevented customers to ramp up of their factory in the production as planned so some customers at the one to two week shut shut.

Shutdowns in addition of holidays.

Coped with the semiconductor shortages, but overall, we continue to see growth rates in other regions.

Okay, and maybe just to follow up on your comments of tiny bit I was wondering if you could maybe just elaborate somewhat more on the automotive end market.

So earlier this year when a number of producers were taking downtime I mean, there were various sources of it.

<unk> was one of the chip shortage was another.

Logistics Port Port availability was decided also in the couple of others.

But from your perspective, when you look for the second half of the year.

How do you see the various impediments that the industry is facing two of return.

More normal production and shipping schedules I mean, how do you see that the developing from from your perspective. Thank you.

We see it returning according to our customers more to normal I mean, the COVID-19 effects are not so pronounced now of the chip shortages until as Peter mentioned significant with customers.

Still with us.

Fighting and we might expect production to be pushed out even into 2022.

Of the logistics have for ourselves on for our customers, mostly returned to normal we are seeing some.

Shortages of raw materials, not just chip shortages flow, but.

Certain plastic and raw materials that are affecting production.

Both for our customers and less so.

We're seeing of mixed patent generally with the Gms business has been stronger than we expected.

So far in the quarter on I think we're confident of outperforming the market is still going forward, but there are still those disruptions that you mentioned.

Okay, Great I appreciate the thank you very much.

Thank you.

Okay.

Thank you and we have a question from Laurence Alexander with Jefferies. Your line is open.

Hi, there can you give us a sense for just how much because of the kind of price mix effects just how much.

Sort of normalized.

Normalization tailwind is flowing through into 2022.

And also how we should think about incremental margins on that volume when it comes back.

Well you know I think if you look at our business in <unk>. We're back the 2019 levels. So I think we show a slight growth if you compare ourselves to 19 level. So I think the recovery is going on quite nicely, but.

If you look to IHS the.

They probably modeled the market to be back to 2019 level.

By 2020 for so.

I think continued to recovery of the market.

The benefit of a good growth rates in the automotive market over the next next year.

Again, I think that's probably what I can say and electronics.

<unk> over the last two to three years, we continuously growing quarter by quarter and show very nice the good strong growth rate.

This will continue for and our expectation over the next year.

The second question was on the conversion.

Incremental sort of incremental margin.

Yeah.

On the automotive industry comes back.

It sounds like Theres, no topline multiplier effects, but what's the incremental margin on those walk on the the recoveries back volume.

I think similar to all of the other market segments with very healthy margins, particularly on the chemistry side.

We are of very strong margin quality.

Convert.

Any any sales increase to.

Our margin.

So with that I think we're well positioned.

With the recovery of the automotive market and the.

The corresponding sales increases we expect.

A nice margin improvement as well for <unk>.

Thank you.

Thank you.

And we have another question from Turkey.

Correct with J P. Morgan your line is open.

Good morning, how are you.

Okay.

Good day.

And did you say that your equipment business was mostly booked through the first half of next year and what was that comment meant for the electronics business for the Gms business off of pumps.

It was mostly meant for the electronics business, which is more built in house, we have additional capacity for Gms, but yes, I said that we are pretty much booked up now on capacity that through the first half of 2022, but it's the typical lead time you know it doesn't mean that the the volume.

Breaks up and we don't see much volume in the second half of the year. Typically is just the lead time that we can with good visibility to the next to the second.

So the first half of 2022.

Okay. That's helpful.

And secondly.

How much of the of Palladium is sourced from from.

From China versus other regions.

Our current tell you that we source from the three major main regions South Africa from.

Russia and from China, and that varies depending on the source and the.

The demand for it within our operations. So we source from all three.

Do you do any type of like catching to manage the cost of <unk>.

No. We don't do hedging we are of very efficient path for it eliminates the cost for us as we pass on the price of the.

The purchase directly to our customers.

Okay.

And lastly, I was wondering what you can just given the update on that on.

Capital projects debt remained to be completed in 'twenty, one the was it going on.

Mexico plant unless the shaft of in excess of Tech centers, just wondering whether you can give an update as to what.

What the Capex spend of Swan and where those projects standard.

Yes sure.

Again I think.

As I mentioned it takes previously we're on track of the.

Of completing all of the planned capital expenditure projects. The key project for US is moving a factory away from Mexico City to collateral.

This is progressing as planned and the.

Get to finalized for the end of this year just the beginning of next year.

On the key focus for US is digitalization as well, Jeff mentioned that Iot is a big value, which we were able to provide to our customers.

The reinvest see invest for internal research capabilities as well as for external.

And the other part is.

The customer oriented projects, which help us to immediately gain.

Chemistry contracts all of that is being planned and as I said, we're a little bit.

Second half you loaded so a lot of project of being completed by the second half of the year and we continue to see that we're going to be in the range of fluent after 5% of sales.

Okay.

Thanks.

I think operator of there's no more questions. So.

If that's the case of just like the thank everybody on the call very much for your questions. Your attention on for your interest and Astrotech summarizing the key points from today's call as in quarter. One supportive of end market. Some of the continuous investment we've made in our technology and product led to yet another record quarter, our lean cost structure and the inherent op.

Operating leverage allow strong conversion of our revenue growth into profit from cash flow, providing financial flexibility and the ability to invest for further growth.

In closing I'd like to thank all members of the Alphatec team worldwide. Despite the challenges presented by the pandemic cyclical swings in supply chain disruptions, we've demonstrated the strength and resilience of our business model over the last year of focus on anticipating and meeting the needs of our customers is not way.

But whether we were on premises or virtual justice in previous downturns I believe.

Merging stronger and better prepared to meet the future, including being part of the MKS family and event to which we are all looking forward.

With that we'll end the call and thank you very much for listening.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Yes.

[music].

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[music].

Thank you Catherine good morning, everyone and thank you for joining at the second quarter 2021 earning.

This call a replay a replay of this webcast will be available on our website for six months. Please.

Please note that Alphatec provides non I for us information and reconciliations between I R. S. 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 of the after tax by referring to our 20-F filings for a list of factors that could cause our results to differ from the anticipated in any forward looking statements. We undertake no obligation to publicly update or revise any forward looking statements, except as required by law.

Please note that when we come to the Q&A at the end of this call we will not be taking any questions relating to the MKS transaction. We ask that you limit your questions to aspects of our second quarter, only and with that I will turn the call over to Jeff. Thank.

Thank you Sarah.

Good morning, everyone and welcome to our second quarter 2021 conference call.

The second quarter was of public company. We are pleased to present, an excellent set of results as you'll remember from a global perspective, Q2, 'twenty 'twenty, what's the quarter most affected by the pandemic lockdowns.

Therefore, as we look at the Q2 results now and for the into our outlook for the rest of the year you will see the effect of the recovery from Q2, 2020 trough as well as the tempering of those very high growth rates as we move into the second half.

In the second quarter, we experienced organic growth of 9% for all of our electronics chemistry. This is a strong result for a second quarter in particular when you consider the by Q2 last year, China had already begun to recover from the pandemic lasts the demand we experienced is primarily driven by.

Secular trends in which we continue to participate, especially five G of millimeter wave as well as advanced semiconductor packaging.

Some of these growth drivers was stronger than expected in Q2, and we believe they will support us well into the future of for example, we had previously expected the the work from home trends would start to abate in the second quarter of 2021, but the arrival of the Delta variants of COVID-19 meant the work from home driven income.

Future demand continues to be strong, particularly in Asia.

In addition of the never ending search for most of our capacity and greater data volumes continued to drive the computer demand and therefore, our customers demand for our products.

And that was a pizza will review later the record order level for electronics equipment. We saw in the first quarter of 2021 translated into very high levels of equipment revenue and as always these equipment sales are supportive of sustainable future chemistry revenues.

In quarter, two last year of general metal, finishing segment experienced a deep trough in demand as a result of the pandemic the rebound from which is clearly visible in the 59% organic revenue growth in the chemistry.

The auto production worldwide remains below typical trend was due to the well known semiconductor shortages.

Strong presence in China, and differentiated offering helped us to grow ahead of the overall market.

Our strong revenue growth coupled with the operating leverage inherent in our business model provided us with of 63% increase in adjusted EBITDA.

Two of record the result of $118 million, we generated adjusted free cash flow from operations of 86 million returning to a very strong conversion rate from adjusted EBITDA. As a result, we ended the quarter with net leverage of three two times EBITDA. So we are well on track towards the targeted capital struck.

Chip.

In this past quarter, we experienced a surge in demand for our sustainability related products in both Gms and the electronic segments at the tech is uniquely well positioned to meet this demand given of our decades of focus and the investment on the sustainable plating solutions.

For example on cover trunk pretreatment of process for decorative plating is currently now up and running with two customers and then the qualification with a further 15 customers our revolutionary patent pending <unk> solution is the world's first P. First free missed the presses and with it we are in the unique position to help right.

Defined the environmental footprint of the play to industry.

I'd like to close with an update on our digitalization of activities. The addition of software to our integrated offering as of further differentiate it and I'm very pleased to announce that we have signed our first contract with a high on the industry partner to implement an innovative combination of Iot solutions and hardware optimization of <unk>.

Which will enable our customer to reduce overall energy consumption and leap day climate related goals.

Although today the percentage of revenues from a sustainability products is relatively small alphatec as the leader with a broad portfolio of products offering tangible benefits to our customers in terms of reducing the environmental footprint of their activities.

Now before I hand, the presentation over the pizza I'd be remiss, if I didn't mention the acquisition agreement with MKS instruments as of July of the first the board of ads of Tech reached an agreement to join with MKS for a total equity value of $5.1 billion.

As the global leader of instrument as a global leader of instrument systems and process control solutions. The measure monitor Pilar uncontrolled critical parameters of advanced manufacturing processes, especially semiconductors similar to ask the attack they have a strong focus on technology and our customer solutions of complementary.

Free for key advanced electronics markets the.

The regulatory approval process for the merger is underway and the transaction is expected to close in the fourth quarter of 2021, we expect the joining with M. Cash will provide additional opportunities for collaboration innovation and continued groundbreaking solutions.

And with that I'd like to hand, it over to our Chief financial Officer of IOP to Friday night for a.

A review of our financial results after which we will take questions and please note of Sarah mentioned, we can't address questions pertaining to the MKS acquisition of today. So please we would be grateful if you could please limit your questions to the subject of our quarterly results Peter.

Thank you Jeff.

Good morning, everyone.

I'm very excited to review our Q2 as of yet.

<unk> record financial results and continue to grow ahead of our end markets.

Let's start on slide four.

For the second quarter on total revenue of $377 million, an increase of 44% over the prior year included including organic revenue growth for chemistry and equipment of 32%.

There is an FX tailwind of 9% and the.

The 3% benefit from the Palladium pass throughs.

Palladium price continued to REIT income.

Contributed 7 million two of top line, while the week of U S dollar of positively impacted our sales of $24 million.

The key secular trends, which Jeff highlighted remain the principle drivers behind our strong revenue growth.

The large degree the high growth rates seen at it.

<unk> are the result of the recovery from last year's quarter, which were heavily affected by the COVID-19 related plant shutdowns, which I will address but I will address our two segments in detail on.

On the latest line.

Looking into our profitability you can see the quality of our gross margin the high operating leverage inherent in our business model as we increased our adjusted EBITDA of 63 per cent compared to the second quarter in 2020.

Adding 370 basis points to adjusted EBITDA margin.

It's worth noting that the hour.

The margin of 31% leads the industry.

Right the negative product mix effect from higher equipment sales as well as the dilution from the pass through of high of Palladium prices.

Similar to the first quarter of 2000 and since 2021 Q2 was also affected.

Fly chain disruptions.

The weighted freight expenses and material inflation. However is anticipated in may we were able to keep the impact on our gross margin to below 2% of sales.

Looking ahead to the third quarter 2021.

Although higher freight cost to begin to abate, we anticipate that the raw material costs will continue to be elevated.

To counter this effect, we continue to work on procurement deficiency.

On the system cost increases to our customers.

Diluted earnings per share was 15 cents for the.

For the quarter, you can see the profound effect of analyzing the quarter most affected by the COVID-19 pandemic and the recovery was it the loss of $3.47 in the second quarter of 2020.

As announced in May we are now publishing an adjusted EPS, we have taken the same adjustments adjusted EBITDA with the addition of the elimination of the amortization expense stemming from the increase in book value associated with the acquisition by Callouts.

The adjusted EPS is pro forma for the prior year period based on the same number of shares as we head into the second quarter of.

Of 2021.

2021 adjusted EPS was <unk> 29 cents per share and here too you can see the effect of the rebound in our strong operating leverage.

You will find the detailed explanation of the adjustments in the appendix slides of this presentation.

Going forward, we will of play the same adjustment, which we believe present an accurate view of.

The earnings capacity.

Well, let's go to slide five for a deeper look into the electronics results.

Our performance on electronics continued to be very strong in the second quarter with total revenue of $248 million increased 33% year over year.

This result included organic growth of 21% of favor of palladium impact of 4%.

On an 8% benefit from FX translation.

Organic growth came at the revenue for electronics was 9% in the quarter on.

Underpinned by the strong growth in the smartphone market is relative think growth the high performance PCB and semiconductor related businesses.

As mentioned in May of this growth has been anticipated and we are pleased to see it unfold.

That said please keep in mind, the 2020 for some shifts in typically seasonality.

The work from home created strong demand for laptops in the third quarter.

And the well known OEM shifted its product launch pattern into the fourth quarter.

As we lap this quarter the base effect caused mathematically lower growth rates compared to what we reported in the first half of 2021.

Electronic equipment sales enjoyed another outstanding quarter with organic revenue up 115%.

The man stemmed from the sources, we have outlined previously the full transition to five G for the smartphone manufacturers.

The high demand for computing.

Our next generation machines and high demand as the Oems in PCB manufacturers seek to meet meet consumer demand.

Electronics generated $85 million of adjusted EBITDA in the quarter.

<unk> 3 million with 36 per.

<unk> improvement over the prior year period, primarily driven by the strong organic volume growth now of lean cost structure.

Margin was $34 three per cent in the quarter up 20 basis points, which is the reflection of the robust organic volume growth, partially offset the product mix effects from higher equipment sales the.

Palladium pad III.

Moving to slide six now.

<unk> total revenue grew 71% to $129 million in the second quarter comprised of organic growth of 59% of 1% positive impact from Palladium net.

The 11% tailwind from FX.

From a mixed perspective, Kermit's revenues grew organically at 59% and the equipment revenue rose 48% of them from a low base.

It's just that this rebound is partly a reflection of the annulus nation of the quarters heavily affected by the COVID-19 pandemic.

But we also observed that high end automobile and construction applications were stronger than expected.

Automotive producers are still operating below full capacity due to the semiconductor shortage, but the demand environment is intact.

So we believe that demand is simply being pushed out possibly even into 2022.

In the meantime, where all the experiencing promising project wins outside of the auto market and strong demand for our sustainability focus solutions.

As Jeff touched on yet.

Up in earlier, we have seen an increase in interest for sustainability related product and CFO, it's worth noting that our preparation to meet this opportunity the risk on many years of development and investment.

For example, the cumulative spend on R&D for the covered trunk system.

It's been nearly $20 million spread over more than a decade.

As we look to earnings <unk>, adjusted EBITDA of $33 million in the quarter end of the adjusted margin was 25, 8% the <unk>.

Growth in adjusted EBITDA reflects our strong operating leverage.

Partially offset by the higher freight expenses is the result of the well known supply chain disruptions and dimension tire material inflation.

The recovery of the adjusted EBITDA margin to 25, 8%.

Thanks to similar effect, it's worth noting.

Let me now back on the path to normalized margins.

Now moving to slide seven.

We generated strong free cash flow of $86 million for debt service returning to the adjusted cash flow conversion rate more in line with our long term target of greater than 60%.

The strong cash flow was also a function of our efficient working capital management with working capital at 16% of revenues in the second quarter.

As well as our efficient capex, which was 2% of revenue.

Please note that we have a typical seasonality to our capex with the majority coming the second half of the of the.

Although the spend as a percentage of revenue was lower than our full year guidance the fully aligned with our internal expectations.

As a result of quota and with 245 million of cash net.

The revolving credit facility of $233 million available. So in total of liquidity of 478 million.

Cash repatriation at the holding level of proceeding as plan supporting our balance sheet efficiency and financial flexibility.

Particularly when it comes to the investing for future growth.

Our net leverage improved to three two times the significant improvement was three seven times the level at the end of the first quarter 2021.

This is partially due to the cash generation and also supported by the generalization of the quarters of 2020, which were affected by Covid.

That said, taking our expected cash flows we should further improve our net leverage by the end of 2021 that'd be the balance on.

On the whole way toward targeted capital structure of two to three times net leverage.

Moving on to slide eight.

Turning to our guidance I'm pleased that our strong Q2 performance and the support for underlying demand trends allow us to once again raise our guidance range.

At the beginning of 2021, we expected the growth range of 10% to 12% for total revenue.

And yet having raising graced that expected range of Mei work.

We're raising it yet again to 13% to 14%.

As I mentioned earlier, please keep in mind that moving into the second half of the year, we start to lap some extremely strong quarter and particularly the fourth quarter 2020.

Coming to our key performance indicator.

Organic revenue growth in the chemistry.

Increased expectations for electronic chemistry to 7% to 8%.

And move the expectations for <unk>.

The high end of the range of 12% to 13%.

This allows the forecast of approximately 10% and organic chemistry revenue growth.

For one percentage point more compared to our previous guidance.

We take we take our adjusted EBITDA guidance for the full year from between four five <unk> to $435 million to a range of $435 million to $450 million.

Adding to the mid point and an additional three percentage points of growth.

This now represents 20% earnings growth for the full year and reflect the confidence in our revenue growth potential as well as the.

The cost discipline and operational improvements.

The underlying assumption for guidance on the same is noted on the slide.

Our capex guidance remains unchanged at approximately four 5% to 5% of total sales in 2021.

We are in line with our full year expectations on major investments are focused on our new Mexican facility.

Realization initiatives with cash.

And the specific project.

As we communicated to you made our guidance for interest expenses already anticipated the refinancing activities.

Therefore, we confirm that the range for normalized interest expense is anticipated.

To be between 70, and 74 million for the year.

This is based on our new capital structure and does not include one time costs related to our refinancing activity.

Finally, our.

Income tax rate, which includes income and withholding taxes should be unchanged at around 30% to 31% while adjusted operating profit.

Looking forward to the third quarter of 2021, and keeping the effects of the pandemic recovery mind.

We feel confident and expecting organic total revenue growth and adjusted EBITDA growth in the high single digit growth range range with that I think we can open the floor for questions operator.

Thank you as a reminder.

If you'd like to ask a question press. The Star then the one key on your Touchtone telephone to withdraw your question press the pound key.

And the first question comes from John Spector with UBS. Your line is open.

Hey, guys. This is Josh Josh Spector.

So just curious if you could provide some granularity on the sequential sales change in EBITDA change in electronics. So you know chemistry sales are only up around 6 million I assume a decent portion of that is the metals, but EBITDA was up $9 million. So you know, we havent heard about costs decreasing sequentially.

Across the space much at all to day so.

So curious of what was the driver of the increase in EBITDA sequentially for electronics.

Okay.

Josh Thanks for let me just take this question for the first of all the <unk>.

Nicely converted our crews into into profit.

Maintain pricing stability at a good mix effects in addition.

We continued to run of very lean.

The lean cost structure than initially expected expected cost increases didn't materialize. So in other words, we haven't had much trouble expenses and the.

We were able just to continue to drive the cost initiatives. We had initially planned.

Okay.

Thanks for that and gentlemen.

Yeah, No that's helpful and I guess just think.

Taking broadly on your strategy you guys have been pretty clear about your equipment plus chemistry driving the strategy.

Combination of the M ksi for their drive that and not asking you to specifically comment on MKS side, but just thinking generally when you go to win new business on electronics, how often or other ancillary equipment providers involved in that conversation when you're trying to get back into that additional application.

Is that something that that's common or unique or can you just kind of characterize how that develops.

Yes, Thanks, I think at the.

Lower and there is usually some competition of its generic plating equipment a lot of our sales have been for.

For areas like unit plate, which is of the leading edge of semiconductor packaging and the sales have been predominantly in those areas and particularly in Asia. Those sales have been driven by two factors. One is the the unit plate gives a lot of environmental advantages to our customers like a reduction in wastewater treatment and costs, but the <unk>.

<unk> enables the.

The customer to use the advanced plating chemistry and meet the very fine line on space requirements.

Inherent within the advanced semiconductor packaging, so that and there is.

We have very high market share.

There is less opportunity for other cost of other suppliers of equipment to comment on them compete which is why we have of very high percentage of chemistry and equipment mix.

Of that part of the market I hope that clarifies Josh.

Yes. Thank you.

Thank you our next question comes from.

Steve Byrne with.

Bank of America. Your line is open.

Yes. Thank you I'd be really curious to hear your view on.

What you're expecting trends in the auto use of metallic coatings to go to from here.

Is that of trend.

That you expect to increase or decrease from here and perhaps the depends on the region of the world the price of the vehicle.

Where on the vehicle interior exterior.

And ice versus E V. If you could.

Comment on guidance.

I appreciate that.

Thank you.

In general we see more use of metallic coatings that the higher end of the market.

Because of the attractive finishes of things like setting chrome, which provide a good of luxury is finished to the automobiles. So we do better on that end of the market. We are also seeing more metallic coatings.

In areas, where the vehicle needs of light weighting as we moved from hybrid into EV electronic vehicles.

For example.

On Poland that might've been metal in the past are now becoming plastic coated coated.

Plastic components due to light weighting and that increases the metal content as well in general we're expecting about 30% more chemistry.

On EV versus I C E and that's driven by the number of fasteners on connectors and electronic.

Additive components as well as the surface, finishing that we're involved with so.

There's a general good trend towards increased medicalization of particularly at the premium end of the market.

Okay.

And Jeff you mentioned this.

The PFS free net suppressant.

Got it.

It begs the question about your legacy missed the precedence.

What what what would be your revenues from the.

The products.

Products, the do continuing piece of.

And maybe more specifically is the the unit operations out there you would at the end by your customer does it generate wastewater.

I can't give you the precise percentage of the minute and we've been helping the customers with auxiliary equipment for wastewater treatment for some time, but just to be clear.

We have.

Strictly a day to the Stockholm convention on the persistent organic pollutants derive regulations. So we're not really responsible for the way that our customers handle on.

For the treatment of the materials, but I'm very pleased that we're now able to move on to a really new range of missed suppressants, where none of these materials are required the.

The one I mentioned in the text the FEMA lock solution.

It's the world's first P. First for you Mr. Suppressant channel. We're currently therefore on track to eliminate all sales of materials containing short term pretty fast.

Which is being very well.

<unk> by the customer basis, they seek to move to meet upcoming.

Coming regulations.

Thank you.

Okay.

Thank you. Our next question comes from Arun Viswanathan with RBC capital markets. Your line is open.

Great. Thanks for taking my question I guess I, just wanted to get a little bit more on the markets. Here. So you know obviously there is there is the automotive exposure in <unk> and maybe that was some of the.

That drove some of the performance was that segment kind of below your expectations on similar ROA and was it due to automotive and similarly.

And electronics.

You guys have had a pretty robust quarter. There you talked about the cost, but just thinking about the demand.

The demand materialize little bit better and if so what would you highlight on on that front I know you talked about COVID-19, but anything else on thanks.

But on the start.

And for Jeff.

Two of them later on.

So again again I think.

Very nice rebound of the automotive business the.

Good growth rates all around in all the regions.

We saw that the China is performing very well, but we also see that the markets are outside of automotive.

Showing good growth rates in.

This was very encouraging and contributed nicely to the great performance of Ciena from the second quarter. When we look at electronics. We also saw that the the performance was better than we initially expected because many markets continued to grow strongly and it's a broad based growth we see strong growth in <unk>.

Martin.

You also see that our.

Work from home driven.

<unk> the <unk>.

Computing.

The cloud services, the all of that drives demand.

And even though on the smartphone cycle moved by a quarter and as you know that.

One of the key Oems are moved the second from the fourth quarter and.

The ending the second in the first quarter, we continued to see growth good growth rates and good demand in China. The all in all it's a broad based growth, which we benefited in the second quarter.

I'd only add okay. That's I think we're seeing good drivers on the <unk> penetration.

Starting millimeter wave penetration.

You've seen upgrades by some of the major smartphone manufacturers in the outlook, which has come through into the supply chain, which has given us.

Better growth than expected and the better outlook as well for the second half of whom we expected ahead of their anticipated launch for the first quarter of next year.

Great. Thanks, and then just the also just wanted to get your thoughts on the equipment business.

Somewhat unique you guys are.

Have you seen more orders there and does that give you visibility into next year.

As well thanks.

Yes the.

Still strong on equipment, we our factories are pretty much fully loaded now we're dealing with some supply chain shortages as well.

On some components.

And I think managing that quite nicely.

Trees in both Germany, and China are pretty much full up on we've got a good order book and visibility average I think two of the second half.

To the first for the end of the first half of next year.

It's mostly driven by electronics, mostly then driven by semiconductor of packaging and HDI, but.

But we are starting to see some interesting inquiries as well for the <unk> business, which we believe should recover next year as well.

Thanks.

Thank you. Our next question comes from David The luck.

True.

The net tariff with Deutsche Bank. Your line is open.

Thank you good morning, Jeff and Peter just looking at Q4 guidance can you comment on the somewhat wide range that looks like a at the low end it could be down year over year, what's pack of it would cause Q for it to be down year over year.

<unk>.

Yes, I think Oh.

We have pretty good visibility for the third quarter and the various factors driving the fourth quarter market trends.

If you look at our market estimations and.

The key.

Marketing firms they see a.

Probably a rather stable.

Slightly declining market for the automotive market in the fourth quarter.

We believe that we outperformed the market, but still.

The fourth quarter 2020, with the very strong automotive quarter.

We are not sure.

With the supply chain shortages.

The the trend is going to be on the electronic side. We continue despite the fact that as I said the.

One of the key top Oems the started there.

They're a smartphone type of in the fourth quarter. We continued to see strong demand. We continue to see growth in electronics again, but the comps are getting a lot more difficult.

With the automotive market returned in the fourth quarter 2020.

And then all of the electronics, particularly the smartphone market performing very very well on the fourth quarter last year. So again, we see that with definitely performance debt levels, but the.

The growth rates are low.

All of it dependent on various factors and.

That's what we put into our forecast.

And just commenting on the first half for the quarter right. Now are you ahead of or in line or behind your your forecast for the topline and EBITDA growth for Q3.

Well it is the guided you saw that we improved our guidance for the full year.

Well, we mentioned over the last calls as well we were quite cautious.

Going into the year, we see of strong confirmation of our growth trends, we see of strong confirmation of our approach it wins.

With that we were able just to increase the guidance for the full year and.

And way, which is to increase on guidance for organic chemistry growth rate as well as the.

Quickly on growth rates, so all in all I think the.

We're able to confirm a more optimistic view for the year.

Thank you.

Thank you.

Yes.

Our next question comes from John Pitzer with Credit Suisse. Your line is open yes. Good morning, guys congratulation on the strong volt. Thanks for letting me ask the question Peter I apologize if I missed this but do you think about your total growth expectation for the full year on an organic basis can you help us kind of parse out how you're thinking about second half palladium pricing and FX impacts.

Well I think we applied the FX rates as of June and stimulated that for the full year. So again any change might or the impact in all of or total numbers of forecast, but again to the please use the the June of fixed rates.

As we applied them for the for the rest of the year.

On the growth rates are we continue to see good growth rates for our business. However, as I mentioned before the comps are getting more difficult.

On the second half of the year the.

China returned to growth the June 2020, no of business.

So you'll see that the comps the change there.

But we also saw as I mentioned before the the automotive market returns.

Strongly in the fourth quarter last year all of that needs to be taken into account sales. We continue to see of very strong performance of our business. We continue to see good demand in automotive and we see continued demand strong demand for.

For all of our latest technologies on smartphones and the.

Although in all the other area.

And then Jeff as my follow up I'm wondering if you could just comment a little bit on the electronics equipment business and the prospects for sustainability I mean, how much of this do you think the cyclically motivated.

Do you think the business is kind of structural share gain on your behalf and I guess as you answer the question I'd be curious as to whether or not you expect to see any impact from the chips. The ACA I think of lot of the people view that is helping from an <unk>.

Happening in semiconductor, but no I kind of get the sense of that you're gonna have to see some backend capacity perhaps.

My greatest the different geographies over time are you seeing that yet and is that something that you expect to see in the future that sustained growth there.

Yes, we have.

We have started to see some of the equipment move outside traditional areas like China, We had some very good orders during the quarter for.

On some other areas of southeast Asia with some new customers, it's being driven by advanced packaging, it's being driven as I mentioned by some sustainability requirements. It's being driven by addition of capacity, but also the wafer level fan out type of applications.

So we're seeing customers the because of those front end.

Our requirements on expansion, you're talking about now starting to add back end capacity in anticipation of that driven as well by titer.

Requirements for areas like smartphone on fibre packaging I'm also pleased to see the that penetration was always good at the leading smartphone manufacturers.

But as market share has been growing in China by some of the other smartphone manufacturers. We're starting to see this please packaging trends flow into those areas as well, which is also helping demand for them.

<unk> equipment in the us the chemistry of that comes with it.

Thank you very much.

Thank you.

Our next question comes from Ben <unk> with Baird. Your line is open.

Okay.

That's why I sort of job could.

Could you talk about.

The favorable lucid sort of Abbott.

From there.

The eight and you're doing the battery.

Recycling as well.

Yes.

Thank you bet.

On sustainable solutions, we are seeing increasing.

Interest obviously from our customers, we have a broad range of auxiliary equipment.

But kind of help our customers with recycling and with reducing any wastewater emissions.

We are also as you may know, we've spent as Peter mentioned, a decade or more of research into moving from the chrome sales to trivalent solutions.

And we've got about 17 customers now either using or actively of Bolton and evaluating the switch which has some major advantages in moving away from things like chromic acid into much safer from alternatives around 57 percentage of R&D today is designed towards sustainable solutions driven.

By this.

<unk> customer demand and I think it provides a healthy tailwind both for our equipment and for our chemistry business going out in the future of that's true both for the Gms business and for electronics on on your latter point.

We are not involved in battery recycling today, although we have commented in the past that we have a number in fact five different.

R&D projects ongoing to look at materials that will go into batteries.

Because it's a fertile area for surface, finishing solutions and the core competencies that we have.

In this area. So it's at RMT stage at the moment with the nothing really to talk about on battery recycling.

Thank you.

Yes.

Our next question comes from David Silver with C. L. King Your line is open.

Yeah, Hi.

One thing I noticed during the quarter was the sequential revenue trend by geography. So Asia was certainly up strongly but I think there were sequential declines in both Europe and the Americas and in particular I was curious about Europe, just given I think.

There would be a positive.

Positive currency effect on top of the underlying business trends. So maybe if he wouldn't mind commenting on the sequential.

Revenue declines outside of Asia.

Overall, we continue the again.

Yes.

We continue to see growth rates in all regions, we were able to grow.

There were some of them.

The specific country.

The focus topics, but overall, we continue to see.

The growth rates both in Europe.

As well as the.

In the U S. Please keep in mind that the recovery was not as strong as anticipated the supply chain issues prevented customers to ramp up of their factory in the production at <unk>.

<unk>.

Some customers at the one to two week shut shut.

Sat down and in addition of holiday in order to cope with the semiconductor shortages, but overall, we continue to see growth rates in other regions.

Okay, and maybe just a follow up on your comments of tiny bit I was wondering if you could maybe just elaborate somewhat more on the automotive end market.

So earlier this year when a number of producers were taking downtime.

There were various sources of it.

<unk> was one of the the chip shortage was another.

Logistics Port Port availability was cited also in the couple of others.

But from your perspective, when you look to the second half of the year.

How do you see the various impediments that the industry is facing two of return.

Of more normal production and shipping schedules I mean, how do you see that the developing from from your perspective. Thank you.

We see it returning according to our customers more to normal I mean, the COVID-19 effects are not so pronounced now is the chip shortage is still as Peter mentioned significant suite of customers.

Still whether it's biting and we might expect production to be pushed out even into 2022.

The logistics are have for ourselves on for our customers, mostly returned to normal we are staying some of them.

The shortages of raw materials, not just chip shortages low but.

Certain plastic and raw materials that are affecting production.

Both for our customers and less so.

We're seeing of mixed patent of generally with the Gms business has been stronger than we expected.

So far in the quarter on I think we're confident of outperforming the market is still going forward, but there are still those disruptions that you mentioned.

Okay, Great I appreciate the thank you very much.

Thank you.

Okay.

Thank you and we have a question from Laurence Alexander with Jefferies. Your line is open.

Hi, there can you give us a sense for.

Sure.

How much because of the kind of price mix effect, just how much.

Sort of.

Normalization tailwind is flowing through into 2022.

And also how we should think about incremental margins on that volume when it comes back.

Well I think if you look at all of our business in <unk>, we're back to the 2019 levels. So I think we show a slight growth if you compare ourselves to 19 level. So I think the recovery is going on quite nicely, but.

If you look to IHS day.

They probably modeled the market to be back to 2019 level.

By 2000.

24, so that might be continuing to recovery of the market the.

The benefit of good growth rates in the automotive market over the next next year.

So again I think that's probably what I can say and electronics.

Periods over the last two to three years, we continuously growing quarter by quarter and show very nice the good strong growth rate.

This will continue for no expectation over the next year.

The second question was on the conversion.

The incremental sort of incremental volume.

Yeah, but when the when the automotive industry comes back.

It sounds like there's no topline multiplier effects, but what's the incremental margin on those walk on the the recoveries back volume.

You know I think similar to all of the other market segments with very healthy margins, particularly on the chemistry side.

We are of very strong margin quality.

Convert are any of any sales increase to.

Our margin.

So with that I think we're well positioned and vs.

With the recovery of the automotive market and the.

The corresponding sales increases we expect.

A nice margin improvement as well for two minutes.

Thank you.

Thank you.

And we have another question from Turkey.

Correct with J P. Morgan your line is open.

Hey, good morning, how are you.

Okay.

Good day.

And did you say that your equipment business was mostly booked through the first half of next year and what was that comment meant.

And then for the electronics business really well for the Gms business also on pouch.

It was mostly meant for the electronics business, which is more built in house, we have additional capacity for Gms, but yes, I said that we are pretty much booked up now on capacity that through the first half of 2022, but it's the typical lead time you know it doesn't mean that the the volume.

Breaks up and we don't see much volume in the second half of the year. Typically is just the lead time that we can we have good visibility to the next to the second.

So the first half of 2022.

Okay. That's helpful.

And secondly.

How much of the of Palladium is sourced from from.

From China versus other regions.

Our current tell you that we source from the three major main regions South Africa from.

Russia and from China, and that varies depending on the source and the.

The demand for it within our operations. So we source from all three.

Do you do any type of like catching to manage the cost or you don't.

No. We don't do hedging we are of very efficient path for it eliminated the cost for us as we pass on the price.

Purchase directly to our customers.

Okay.

Lastly, I was wondering what you can just give an update on the.

The capital projects that remainder of the completed in 'twenty one the was it going on.

Mexico plant unless the shafts of in excess of Tech centers, just wondering whether you can give an update as to.

What the Capex spend of Swan and where those projects standard.

Yeah, So again I think of.

As I mentioned it takes previously we are on track of.

Of completing all of the planned capital expenditure projects a key project for US is moving a factory away from Mexico City to collateral.

This is progressing as planned.

The geared to finalized for the end of this year just the beginning of next year.

Key focus for US is digitalization as well, Jeff mentioned that Iot is a big value, which we are able to provide to our customers you reinvest invest for internal research capabilities as well as for external.

And the other part is the customer oriented projects, which help us to immediately gain.

Chemistry contracts. So all of that is being planned and as I said, we're a little bit.

Second half you loaded so a lot of projects of being completed by the second half of the year and we continue to see that we're going to be in the range of falling off the 5% of them.

Okay.

And I think operator of there's no more questions. So.

If that's the case of just like the thank everybody on the call.

Much for your questions your attention on for your interest and Astrotech summarizing the key points from today's call as in quarter. One supportive of end market. Some of the continuous investment we've made in our technology and products led to yet another record quarter, our lean cost structure on the inherent operating leverage allows strong conversion of our revenue growth into <unk>.

So on cash flow, providing financial flexibility and the ability to invest for further growth.

In closing I'd like to thank all members of the Alphatec team worldwide. Despite the challenges presented by the pandemic cyclical swings in supply chain disruptions, we've demonstrated the strength and resilience of our business model over the last year, our focus on anticipating and meeting the needs of our customers is not way.

But whether we were on premises or virtual justice in previous downturns I believe.

Merging stronger and better prepared to meet the future, including being part of the MKS family and event to which we are all looking forward.

With that we'll end the call and thank you very much for listening.