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Edited Transcript of ATS.VA earnings conference call or presentation 7-Nov-19 7:30am GMT

Q2 2020 AT & S Austria Technologie & Systemtechnik AG Earnings Call

Leoben Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of AT & S Austria Technologie & Systemtechnik AG earnings conference call or presentation Thursday, November 7, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Gerstenmayer

AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO

* Gerda Königstorfer

AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Director of IR & Communications

* Monika Stoisser-Göhring

AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Deputy Chairwoman of the Management Board & CFO

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Conference Call Participants

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* Daniel Lion

Erste Group Bank AG, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Shane Orion, your operator today. Welcome, and thank you for joining the AT&S conference call on the results for the first half year 2019-2020. (Operator Instructions)

I would now like to turn the conference over to Ms. Gerda Königstorfer.

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Gerda Königstorfer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Director of IR & Communications [2]

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Good morning, and welcome to the conference call of AT&S. We are presenting today, the first half year results. Today, Mr. Gerstenmayer and Monika Stoisser, the CFO, will present the results of the first half year and give you an update of the market and also an update of the investment in Chongqing and finally also the outlook. And as mentioned before, we have afterwards, the possibility for Q&A.

Now I will hand over to Mr. Gerstenmayer.

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [3]

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Good morning, everybody, also from my side. As Ms. Königstorfer already mentioned, I will start with a brief overview about the latest market developments and about some future trends.

Turning to Page 2. Here, you can see the growth opportunities we have identified in all the segments AT&S is active in. The communications segment, our identified growth applications are all around the new applications like 5G, Artificial Intelligence, Internet of Things.

In the consumer and computer business, we see a lot of new applications coming up, especially in the area of smart watches, speakers, robots, virtual reality, but also in the communication networks, like edge computing, cloud computing, big data and data service.

Automotive, despite it's in some challenging direct territories, actually, we clearly see, for the future, a lot of growth opportunities there. Everything is around autonomous driving, like with sensors, in radar, lidar, camera. The communication area of automotive, 5G, car-to-car communication, car-to-X communication and also Artificial Intelligence.

And for sure, the electric-driven car will also cause some additional demands in future and also need additional new technologies. Industrial and Medical, especially the area of automation, also, this segment is in some challenges actually, due to the lower economy. But also for the future, we see once Automotive and communications is catching up again, the industrial investments will come back and a lot of digitalization activities and new applications are expected to be introduced.

In the Medical area, it's very nice, continuous and robust business environment. What we see there, especially in the area of therapy devices and applications and also in the diagnostics. This is mainly driven by the societal development in the society, and everybody knows the aging society will cause some future demand in the medical therapy area.

Turning to Slide 3. What is our current market environment? What we are in? And what we are dealing with? First of all, we need to consider that we have still these trade frictions between U.S. and China. We have seen some slight positive messages over the last few days, but never knows what Twitter will show us tomorrow, and the uncertainty will stay in there for the time being.

The political environment, like the Brexit, you see this disaster for the last 3 years now, so it's hard to predict what will happen there. All of that creates quite some uncertainties in the markets worldwide, and I think this is 1 of the drivers that the economy has slowed down.

The automotive market also shows quite some weakness. This is mainly driven by the uncertainties about the future of the powertrain. Some of the industry experts also say, somehow home made problem out of the automotive industry because the problems have not been solved, and the communication around the diesel scandal and all the others was not a really great one. So consumers are very concerned about the future and are hesitating to buy new cars. But for us, still this is a situation which will stay temporary and will be removed once the uncertainty is gone.

Especially for us, we see a very nice future in terms of additional opportunities because still the trends about growth of electronic content in the car will continue and it was already supporting us in the past quarters. It was also compensating somehow the decline in the car unit sales, the value of electronic components contained in the car continuously increases.

The 5G infrastructure, the base stations and all these kind of things are started to be installed over the past months, this will continue for the upcoming years.

For the mobile devices. In 2019, there was not so much significant volume visible, but we clearly see from 2020 onwards, with the mobile devices being able to support the 5G standard, will start to grow and will show significant volumes.

In the area of Artificial Intelligence, and the applications around that, we see a lot of development, and the main impact to our business is that we see a significant increase in data volumes, which is supporting new technologies in terms -- in the area of processing, which means higher, powerful CPUs, GPUs will be needed, and this is also driving the complexity and the value of IC substrates to enable the necessary computing power.

And overall, the miniaturization and modularization trend is still a strong one, continues, and I will show later on how we assume how the market will grow.

In figures on Slide 4, you see how we estimate the market development. This is showing the PCB and the IC substrate market. In total, what we see over the next 5 years, a market growth of more than 6% mainly driven by IC substrates with a double-digit growth rate of 11.4% and supported also from the automotive business, 7.1%; consumer, almost 5%; communication about 5%; and computer, around about 4%.

So you see, we are in a strong market environment. And once the uncertainties are removed, the opportunities will kick in for further growth. And as you have seen from the first slide, '18 is well positioned to support all these areas due to our strategy and our product and application portfolio.

We communicated in May this year, when we have done our annual press conference and also the call, the investors call, about our strong move towards modularization. On Slide 5, we tried to illustrate a little bit what is really behind modularization.

On this slide, on the left-hand side, you see -- you can see, for example, a smartphone, which is populated with these 3 components on the surface. On the right-hand side, you see a smartphone like PCB like it's looking like 2019, but there's not so much discrete components on the surface anymore. You see already quite some modules like our wireless modules, power amplifier modules and so on and so on, which are used already there and which provide a much higher level of integration and thus, also supports the miniaturization.

On Slide 6, you can see some application areas of modules, which we identified to be, for us, the most attractive ones. Finally, you can see that, especially in the area of RF wireless, which is supporting in the future the 5G communication mainly, and also the wireless networks, the market is expected to grow for the next 5 years by 12%.

Also the sensor area, which is a very strong one. You can imagine all these things around us smart devices, but also autonomous cars need numerous sensors inside to detect the environment and all other things, IoT is supporting sensor, is expected to grow by over 30%.

Camera, which is also one part of the sensor sector, is expected to grow by 9%, and it's the power area, which is not only electric cars, it is also the mobile device and power efficiencies. There, the big thing is growing by 9.4%.

These are the main application areas and clusters we are taking care of when we talk about motor integration services. This is what we are driving forward to be part of the value chain also on that.

So summarizing also that. On top of that, what we have seen over the last years in growth and in applications to support the industry with the main boards, PCB main boards. In addition, the module opportunities come on top in future, and this is additional growth opportunity for AT&S.

Coming now to the highlights of the first half year. In total, we see that our operations and our strategy is still right on track. We are positioned in the right areas, and the performance of our factories is doing quite well. We have this macroeconomic environment turbulences around us. Definitely, we could not completely avoid impact on -- at least on our bottom line, on the top line. Ms. Stoisser will show later that it was more or less flat. But we also could see that with our broad product portfolio, customer portfolio, we could balance quite well and limit the impact.

Also in the area of mobile devices. Even if we cannot talk about specific customers, we have seen over the last 1, 2 quarters that we were able to broaden our customer portfolio. This was quite some great success, what we achieved there and makes us optimistic that also this area in the mobile devices will be -- will have further balanced customer and application portfolio in future.

So this is what I wanted to talk about in the market, and some of the highlights of the first quarter. I will hand over to Ms. Stoisser now to run you through the financials of the first quarter. And later on, I will talk a little bit more about the investment program in Chongqing, and how we see the growth opportunities in the IC substrate business.

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Monika Stoisser-Göhring, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Deputy Chairwoman of the Management Board & CFO [4]

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Good morning, and welcome, also from my side. I will lead you now through the financials of the first half year. I'm starting with Slide 9, an overview about our figures.

The revenue following the challenging market environment is now at EUR 490 million compared to the last fiscal year of EUR 517 million, though we had a positive impact from out of our ForEx changes.

The EBITDA is now at EUR 101 million compared to EUR 138 million. On the one side, we had price pressure during -- regarding or coming out of the demand. We also had a negative mix. And for preparation for the future, we had higher R&D expenses. These are, for example, run up costs for modularization and miniaturization.

Out of this, the EBITDA margin is now at 20.6% compared to the prior year 26.8%. We are still in the target margin between 20% and 25%.

Following to that, also, the EBIT decreased to EUR 30 million (sic) [EUR 29.4 million] compared to the last fiscal year, EUR 72 million. The deviation is a little higher because we have higher depreciation coming out of the higher capacities we currently have and also coming out of the IFRS 16 effect.

Our operating free cash flow is impacted by the higher CapEx as a preparation for the IC substrate and also due to technology upgrades. CapEx is at approximately EUR 92 million.

Coming to Slide 10. The overview about the quarter development. We see that seasonality, as always, Q1 was lower. And now Q2 is, again, the higher one with 206 -- EUR 267 million and an EBITDA margin of 24.7%.

The revenue split is more or less the same as we had in the last fiscal year, 2/3 coming out of the mobile device and substrate business, 1/3 coming out of Automotive, Industrial and Medical.

Also, the splits by region is the same, 2/3 going to the end, decided to the Americas, 16% to Germany and Austria and the rest to Asia and other European countries. Having a look at our business units, Slide 11, business unit mobile devices and substrates. The revenue was slightly lower, especially the revenue with external customers now at EUR 330 million. Also, the EBITDA margin is lower. It is at EUR 80 million now, margin at 20.9%. It was driven by a strong demand in the IC substrates. We had some positive effects, especially here in this business unit. On the other side, we had an unfavorable product mix in the mobile devices. And as Mr. Gerstenmayer also already mentioned, we had a lower ramp of the new smartphone generation, which led to an underutilization in the mobile devices.

But currently, we see a satisfying capacity utilization, which leads us positively to the first -- after the second half year of this fiscal year. Coming to the business unit, Automotive, Industrial and Medical, out of the overall trends within Automotive and Industrial, also in this segment, we had a lower revenue compared to the last fiscal year, especially looking at the external revenues, the revenue external is now at EUR 160 million compared to EUR 168 million in the last fiscal year.

And also here, the EBITDA and EBITDA margin suffered out of the challenging market environment and the price pressure and underutilization we had to face within this half fiscal year currently.

Coming now to Slide 13, an overview of the profit and loss statement. Most of the figures I already -- I have already mentioned. I would only like to focus on the finance costs, which are positive, currently driven by higher interest income but mainly driven by a positive ForEx effect and lower interest expenses.

Earnings per share are now at EUR 0.40. And the profit of the period is EUR 20 million. On Slide 14, some comments on our statement of financial position. The equity is a little lower than it was per 31st of March. We are now at an equity ratio of 42.5%. The lower equity is mainly coming out of negative ForEx effects, coming out of the translation of our Asian assets.

These negative effect amounts for EUR 24 million. The second effect was the dividend payout in July. Net working capital, it's a little higher. And net debt is also higher to -- coming out of the higher CapEx end. Also here, we have an impact of the IFRS 16. Coming now to the cash flow statement on Slide 15. The operating cash flow is a little higher due to higher payables and lower income taxes that has to be paid. The investing activities had higher net CapEx, as I have already mentioned, but also the investment of the -- in the financial assets has been lower compared to the last fiscal year.

The cash flow from the financing activities is much lower than it was in the previous year. This is the main effect due to the issuance of the promissory note loan in November 2018.

Out of the CapEx, also, our operating free cash flow is lower and is negative now with EUR 90 million due to the higher CapEx as I have mentioned. Coming to Slide 16, an overview on the net CapEx. On the one side, you see the development within the last fiscal years. And on the right side, you see the CapEx we had in the half year. Last fiscal year was EUR 38 million and currently, we're at EUR 92 million. I will now hand over to Mr. Gerstenmayer, again, for the update on our IC substrate business.

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [5]

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Thank you very much, Ms. Stoisser. Giving you a brief update about the expansion and the drivers behind the decision, starting on Slide 18, what we see from the future of the IC substrate business, and as I have mentioned before, there is significant growth. The growth is mainly driven by the value -- increasing value of the components needed in future, not so much by the unit numbers.

So knowing the market and having closely looked into it, we decided that IC substrate is one of our strategic focus areas. And this was the -- one of the reasons why we decided for this significant investment. The investment volume, what we already communicated for the time being, still, is EUR 1 billion. Definitely there is a lot of things going on in the background, negotiations with suppliers, detailed planning about equipment needed. And then there will be some movement up and down there. But in total, we expect not to exceed this EUR 1 billion in -- at all.

We always talk -- ask about the risk, how we cater it and how we mitigate it. I want to highlight here that we have 2 major success stories in the companies. The 1 is we are already operating successfully in the Chinese ecosystem since 2001, and we have been ramping now almost 5 different plants as greenfield operations very successfully, so our concern about the environment in China is quite limited.

We all know the trade frictions between China and U.S. but so far, we do not see any impact. And we do also not expect significant impact, despite there could be coming up additional opportunities because one topic should be very soon become visible that China's increases its efforts to build up its own semiconductor industry, and AT&S is the first company who could support Chinese potential customers for more advanced technologies.

So for us, it's more an opportunity than a threat. On the other hand side, the technology and the investment itself in the factory. We had quite some discussions few years ago when we started the IC substrate business in Chongqing. I know there have been huge concerns about the project. But as you can see, finally, we succeeded also there, and we positioned ourselves very well in the market. We are running a very -- operations on very high-performance levels. Quality levels are very high, and also the technology we are providing out of the factory already is on the benchmark level of the industry.

So derived from there on, our expectation is that the project should run rather smooth when it comes to our internal preparations, technology and all these kind of things, but filing in the market, risk space there. But also there, I think we had good position in the market. We are well connected to the most important companies in the industry, and we continue to improve our position there.

Yes, I think this was mainly the overview about the project. Finally, probably to state, real revenues will come out of the factory in the fiscal year 2022, 2023, which you can also see from this slide 19, where we have tried to show you the capacity ramp of the entire IC substrate business.

We have communicated almost, 1 year ago, November 2018, that we have started the Phase 2 in Chongqing I. This is now coming into operations in the beginning of the next year. This is the first increase of capacity you can see on the time line, on Slide 19, which leads to almost 90% additional capacities. And then the new technologies are coming in also, still from the Phase 2 over the year '21, '22.

We expect the new factory to be certified in the beginning of 2022 and then continuously ramping until 2024. This is the time line we have incorporated in all our plants and our business cases. And for the time being, we see a stable execution. As I said, also the plant 1 expansion, plant 1, Phase 2 expansion, is on track, will become operational at the beginning of the next year. We see it already because qualification is already ongoing, and things are quite stable.

On Slide 20, a few words. What I said before, the value of the components is increasing. This is -- the rationale behind is that due to a bigger size of silicon, but also a higher level of integration of different functionality within the processor package the size of the substrates needs to increase. The layer count will increase, which means that the value of the IC substrates significantly come -- will be higher. But also the complexity and the technology needed there is increasing, so this gives us a good opportunity to differentiate us more and to move further up in the technology ladder. The whole project brought us to an update of the midterm guidance, we provided end of fiscal year 2020. In May, summer -- in summertime, we issued a new midterm guidance update of the midterm guidance and with all the investment we are doing now in the IC substrate business, the group revenue is expected to be doubled to a level of EUR 2 billion in the next 5 years.

For sure, if you do an average calculation, that would be a growth rate, an annual growth rate of roughly 15%. As you know, when the factory is not there, it will be more at the end of the time line, so it is expected that the bigger jumps in the revenue growth will come somewhere in '23, '24.

Also, the EBITDA is expected to increase significantly. Our EBITDA margin expectation now is between 25% and 30%. And once the investment is done, the ROCE target is still above 12%. Okay.

So I think this was mainly it from my side. I will hand back to Ms. Stoisser to give you the outlook for the running fiscal year.

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Monika Stoisser-Göhring, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Deputy Chairwoman of the Management Board & CFO [6]

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Thank you. Coming back to the current fiscal year '19, '20. What we have published in May, we can still confirm. The revenue will be stable and the EBITDA will be in a margin between 20% and 25%. We are confident with this outlook coming out of this -- of our broad product portfolio and coming out of the investments we have been doing in the past for new technology. And therefore, we can compensate some of the market fluctuations, especially within the IC substrates. And the Medical segment, we see a good demand, and we see a satisfying capacity utilization within mobile devices.

Nevertheless, Automotive and Industrial. Here, there is an ongoing price pressure and the lower demand to be seen. The CapEx, we have published the guidance for this year for technology upgrade in the amount of EUR 80 million to EUR 100 million and some additional EUR 100 million, if needed, depending on the market development for capacity and technology expansion.

And in July, renewed the CapEx within this fiscal year for IC substrates, up to EUR 180 million. In total, as the investment is progressing, and we have more visibility, we expect the total CapEx within the group, up to EUR 340 million within this fiscal year. So we are confident that we can show solid results, even in this very challenging market environment.

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Gerda Königstorfer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Director of IR & Communications [7]

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Thank you, Monika Stoisser, Andreas Gerstenmayer, for the report on the first half year. Now we are coming to the Q&A session, and I hand over to the moderator to handle the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Daniel Lion.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [2]

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I would like to understand a little bit better how you expect the dynamics for the second half year. You confirm the guidance, which, of course, when you just do the simple maths, you see that's -- that dynamic should improve considerably. But would you now expect this to be a third quarter topic already? Or is it rather fourth quarter? Or is it a combined topic? And as you mentioned that you gained new clients, I would assume that this is the reason why you are so confident to reach the guide -- your full year guidance. Maybe you could give us a little bit more insight?

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Monika Stoisser-Göhring, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Deputy Chairwoman of the Management Board & CFO [3]

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Okay. Yes, we consider the second half year as a -- to be better than the first half year. And usually, in Q2 and Q3 are the strongest one within 1 fiscal year. And this should be similarly also in this fiscal year, but we should not forget that the Q4, which is January to March, within each fiscal year. In the last fiscal year, we really had a big slowdown in the market, and therefore, also a very negative impact on the profitability. So it is more or less, a mixture out of both quarters.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [4]

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Okay. And then following up on this, and maybe also going then into 2020. Also reflecting on the new customers that you mentioned, would you see the capacities that you have currently in place, especially for SLP, to be sufficient to supply the markets and the market needs? Now in the light of the strongly increasing 5G adoption rates, those market estimates are currently from 150 million to 200 million, some even mentioned 300 million 5G smartphone units to be shipped next year. So would you expect there to be well positioned already?

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [5]

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I would say, yes. What we see from the market forecasts, but also from some of the customer forecasts for the products in 2020, it will be still a mixture out of -- and you're referring to SLP, you're mentioning about mSAP. There's still a mix out of mSAP applications and any layer applications. As we all know, 5G, the first generation, is now kicking in, but it's still sub-6 gigahertz applications mainly because the networks are not there. So there will be an evolution over time. AT&S is at least one of the best positioned companies in this area in terms of mSAP technology and capacity. We have been the market leader for the last few years in the technology, and we do not see significant capacity additions in the market. So our position remains still very strong. And also from the customer side, we are very well linked to all these one, who are leading in the 5G adoption.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [6]

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Maybe a follow-up on this one, would you expect to move into the -- maybe the next or the smaller node already next year, in terms of light space -- light spacing? Or would you still expect that the current light spacing will be primarily used in models...

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [7]

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For mSAPs?

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [8]

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For mSAPs. Yes.

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [9]

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Most of that is a niche. We have prepared our road map towards 2025. But there's not very much detail, and I think we need to be careful what is really then used. So from a technology point of view, the capabilities are there, it depends heavily how the 1 or the other customer will adopt the products and the designs towards these technical requirements.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [10]

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Okay. And then maybe one -- I would have many more, but certainly for the others as well, of course. One more on the modularization. As you showed that we are still pretty much already moving into the modularization. What does this mean for you? Not specific regarding content gains, but platform. Are you witnessing these content gains already? And how do you see the dynamics of these content gains? And maybe, could you quantify it what this potential really means for you?

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [11]

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First of all, from the content gains you're mentioning, I think we already communicated in the past that we have a more step-approach there. Our first move into modules is to provide substrate in these tiny small PCBs for module customers. This is the first step, we are proceeding, and we are progressing. The second one will be then, the module integration part. This means that we need to add the value chain to be able to do the assembly, to do the test. And to do the final packaging.

This is what we are not moving into very fast because we need to prepare for that. In some areas, when it comes to chip embedding, we can provide some solutions already, but if it comes to traditional packaging solutions, then we need to continue with our preparation activities. So from the time being, the additional value gains, what we get is, besides the main boards, what we have been shipping to the customers, we can now provide already our substrates and PCBs for modules and for module customers.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [12]

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And what would -- what will be a relation or a content gain? Could you sum up, give us a quantification on what this could mean? Is this like 20% more, 30% more? Yes...

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [13]

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If we -- I think this was also on 1 slide we have shown in the past. If we talk about pure PCB/substrate for modules, the value of the PCB module will be around about 3% to 5%. If we would provide an entire module from -- out of module integration services, it could come up, up to 12% value.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [14]

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And if you leave aside the integration services, which are rather back-loaded from the current point of view, what would be then the relation? I'm trying to filter out what would be now the potential for the coming, say, 2, 3, 4 years as long as the integration services are not there.

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [15]

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But this is what I mentioned before, this is this 3% to 5% value from a module is dedicated to the substrate, and the PCB.

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Gerda Königstorfer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Director of IR & Communications [16]

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May I ask the moderator to organize the Q&As?

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Operator [17]

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(Operator Instructions) There are currently no further questions in the queue.

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Gerda Königstorfer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Director of IR & Communications [18]

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Let me say thank you for your attendance of the conference call, and we wish you a nice day. Thank you.

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Andreas Gerstenmayer, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Chairman of Management Board & CEO [19]

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Thank you very much. Bye.

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Monika Stoisser-Göhring, AT & S Austria Technologie & Systemtechnik Aktiengesellschaft - Deputy Chairwoman of the Management Board & CFO [20]

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Thank you. Bye.