Atotech Ltd (ATC) 2021 Q1 法說會逐字稿

Good morning, and welcome to Atotech's First Quarter 2021 Earnings Conference Call. Today's speakers are Geoff Wild, Atotech's Chief Executive Officer; Peter Frauenknecht, Atotech's Chief Financial Officer; and Sarah Spray, the Head of Investor Relations. (Operator Instructions)

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.

I'd now like to turn the call over to Ms. Spray. Please go ahead.

Thank you very much. Good morning, everyone, and thank you for joining Atotech's First Quarter 2021 Earnings Call. A replay of this webcast will be available on our website for 6 months. Please note that Atotech provides non-IFRS information and reconciliations between IFRS and adjusted measures are included in our presentation material, which are available on our website.

I'd like to remind everyone that our comments today contain certain forward-looking statements that are inherently subject to uncertainties and risks. We caution everyone to be guided in their analysis of Atotech by referring to our 20-F filing for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.

And with that, I would like to turn the call over to Geoff.

Thank you, Sarah, and welcome on board. Good morning, everybody, and welcome to our Q1 2021 conference call. We're pleased to present strong results in our first quarter as a public company. As you will remember, Q1 2020 was the first quarter of the coronavirus pandemic, which hit China first. Therefore, as we look at our Q1 results and further into our outlook for the rest of the year, it's worth remembering that we, like many other companies, are lapping some quite weak quarters from last year.

That said, the underlying demand fundamentals for our products are strong, and we continue to see not only recovery, but meaningful secular growth in our end markets. New trends such as advanced packaging and semiconductors and high-density interconnect circuit boards will continue to drive demand for our chemistry and equipment. We will continue to support and benefit from both areas with our industry-leading customer service approach in all key markets. We're also continuing to invest in and develop our related software applications, which will help to differentiate our advanced equipment offerings going forward.

In Q1, we experienced a strong acceleration in the underlying organic growth for our electronics chemistry. Here, the pandemic recovery played a smaller role as the majority of the acceleration is driven by secular trends in which we participate, especially 5G and millimeter wave and where we are supplying chemistry and equipment to the component manufacturers of both the infrastructure projects as well as into advanced smartphones.

We expect that going forward, in 2021, these drivers will continue to be very supportive as we see good utilization rates of our customers, strong demand for electronics equipment and Q1 sales were excellent, as Peter will review a little later. We're also seeing all-time record order levels for our advanced plating equipment following our substantial investment in new models and upgrades over the past few years. Of course, this is encouraging for our future growth as such sales usually come with the prospect of multiple years of associated chemistry sales. Our general metal finishing segment also performed very well with organic growth for our GMF chemistry, increasing 11%. We were particularly pleased with the strong recovery in our markets in Greater China.

In 2021, we expect that our GMF business will continue to perform slightly above the unit growth than our end markets as we continue to leverage the many trends associated with the move towards automobile electrification. Lightweighting, advanced coating of plastic materials and the move away from hexavalent chrome materials all hold promise for growth as we continue to invest into and promote sales in these areas.

Now this quarter, we've all been painfully aware that the improving pandemic trends have been offset by some well-publicized supply chain disruptions. And I refer here to the semiconductor shortages, plastic supply issues, winter storms in the U.S., particularly the deep freeze in Texas as well as the unfortunate blockage of the Suez Canal. While we remain firmly convinced that the impact of these disruptions will be resolved as we move through the second half of this year, we do observe impact to the auto market recovery, which is delaying some production volumes as well as causing higher freight expenses and material costs. We are doing our utmost to mitigate these effects, and you can be sure that the guidance, Peter will give, takes those concerns into account.

We maintained a high level of profitability, increasing our adjusted EBITDA by 32% year-over-year and generating a solid adjusted free cash flow from operations, which was affected by the timing of some payments. This quarter, our net leverage ended at 3.7x EBITDA, this is a significant reduction from pre-IPO levels. And as Peter will recount shortly, we've also successfully refinanced our debt position.

Now I'd now like to update you on some of the key initiatives that we are working on today. To start, we continue to invest in not only our chemistry, but also the equipment with which we drive chemistry revenues, particularly in Electronics equipment, we're dedicated to creating a platform approach that will be interchangeable across all end-use technologies. We expect that will provide us with the flexibility to leverage trends as they appear, develop new lines quickly and also provide our customers with an excellent value proposition.

Further, the pandemic has driven significant technology advances worldwide and at Atotech, we're committed to maintaining our leadership through digitalization of our processes. To that end, we've launched several projects. Internally, we are implementing IIoT or Industrial Internet of Things capabilities for our plating applications that we anticipate will help our customers increase their throughput and improve quality.

We've also started an e-commerce project in an effort to become a better partner to our existing customers to access new customer segments and to enable seamless omnichannel customer interaction. We have some quite ambitious multiyear goals in this area, but are starting small and aim to have a pilot launched by the end of this year. This is the first initiative of what I hope will be an array of new services to customers.

In March, we formally opened our development center in Manesar, India and commissioned our newest chemistry production site in Yangzhou, China. We're also excited to have broken ground on our newest production facility in Carretero, Mexico. This new plant will meaningfully increase our production and warehousing capacity in Mexico, which supports production capacity we need for the expected increase in business in the Americas region overall. For our employees, the new plant offers optimal working conditions in an attractive location with state-of-the-art technical and safety equipment.

Last quarter, I received some questions around ESG, and I'd like to close with an update of our activities. As a newly public company, we understand that we need to develop useful and transparent reporting practices in all areas, and especially including ESG. And to that end, we're increasing our resources so that we can complement our already existing and deep internal reporting with best practices when it comes to external reporting.

Although this may not be a quick exercise, over the course of the next year, we expect to greatly improve our external reporting efforts in this area. Of course, reporting is only 1 side of the ESG coin, the other more interesting aspect is the opportunity side and what our products and technology can do for our customers and the global efforts to reduce the environmental burden of manufacturing. Atotech has a long history in this regard. For decades, we've been pioneering the elimination of harmful substances and enabling highly efficient and environmentally sound production and manufacturing. For example, 25 years ago, we introduced our first chrome VI free solutions for corrosion protection. And today, we believe our covered chrome product is a best-in-class and cost-effective solution for the chrome VI free decorative coating of plastics.

We continue to tilt our R&D towards sustainability-driven markets and applications. For example, we see significant potential to translate our copper plating technologies to replace the use of silver paste in solar photovoltaic panels, which can improve the resiliency of panels while simultaneously lowering the manufacturing costs. We also supply chemistry for the corrosion protection of fasteners and joints, which are critical to the wind energy business as well as for the electric engine development. We see sustainability as a clear growth driver for Atotech in the years ahead.

And with that, I'd like to hand you off to our Chief Financial Officer, Peter Frauenknecht, for a review of our financial results, after which we'll be happy to take your questions. Thank you. Peter, over to you.

Thank you, Geoff. Good morning, everyone. I'm very excited to go through our strong Q1 financials with you the first time as a public company. In fact, it's a pleasure to present record results this quarter as we participate in the global recovery following the challenging quarters at the beginning of 2020 and continue to outperform the market.

Let's start on Slide 4. For the first quarter, our total revenue was $353 million, an increase of 25% over the prior year, including organic revenue growth for chemistry and equipment of 17% as well as an FX tailwind of 7% and a 1% benefit from palladium price pass-throughs.

Palladium price continued to rise and contributed $4 million to our top line while a weaker U.S. dollar positively impacted our sales by $19 million. Broad-based secular trends in Electronics since the recovery of the automotive market were the key drivers of our organic sales growth. A strong presence in the Asian market gave us the opportunity to benefit from the robust recovery of these markets. Also, our positioning at the upper end of the market coupled with our market-leading innovation power, allowed us to convert the strong market growth rates into sales growth. I will address our 2 segments in detail on the later slides.

Looking into our profitability. We were able to grow our adjusted EBITDA 32% compared to the first quarter in 2020, primarily driven by organic volume, partially offset by the effects of the recent supply chain disruptions. Geoff mentioned the well-known global supply chain issues earlier, and also we were not spared. The impact to our gross margin was less than 2% of sales. Key impacts, which we recognized were higher freight expenses in order to maintain our service levels and various elevated inflationary effects. Our teams did a fantastic job to maintain our strong service levels in these turbulent times. We're working on multiple ways to further strengthen our supply chain and increase an efficient flow of products. We're keeping a very close eye on this as we recognize that these effects also affect us in the second quarter in our guidance, which I will get to later, reflects our latest expectations.

Adjusted EBITDA margin was 31.2% in the quarter, up 150 basis points. This is notable considering the negative mix effects as well as the mathematical dilution of the higher palladium price. Again, the primary driver of this increase is our leverage of our organic growth in volumes, mostly in chemistry. Our margin continues to be amongst the highest in the specialty chemical industry and illustrates the quality of our business. Diluted earnings per share was a negative $0.55 for the first quarter. Using the weighted average number of shares for the respective period, the adjusted earnings per share improved from $0.15 in the first quarter last year to $0.35 per share in the first quarter 2021. The principal adjustments are the effects from the refinancing and IPO as well as the reversal of amortization expense. We will present a detailed explanation of the applied definition during our next quarterly call.

Now let's go to Slide 5 for a deeper look into the Electronics result. Our performance in Electronics continued to be very strong in the first quarter, where total revenue of $226 million increased 31% year-over-year. This result included organic growth of 21%, a favorable palladium impact of 2% and an 8% benefit from FX translation. Organic growth in chemistry revenue for Electronics was 15% in the quarter, underpinned by the dynamic smartphone market in Q1, especially in China as well as the strong growth of the high-performance PCB in semiconductor-related business, triggered by higher demand due to work from home, higher value in 5G smartphones and other ongoing technology trends.

These growth trends had not fully unfolded last year, and we expect them to accelerate and define demand for the coming years. Electronic equipment sales enjoyed an outstanding quarter with organic revenue up 77%. This demonstrates the success of our integrated business model, the innovative strength, which enables us to position ourselves as the best choice for our customers. As manufacturers transition to the next generation of complex PCBs in semiconductor packaging technologies, we lead the way.

Electronics generated $76 million of adjusted EBITDA in the quarter, a $21 million or 38% improvement over the prior year period, primarily driven by the significant higher organic revenue at market-leading gross margins and the ability to pass higher costs through to customers. Margin was 33.6% in the quarter, up 180 basis points, primarily reflecting volume leverage on organic growth in chemistry and solid pricing, partially offset by the palladium pass-through product mix and some supply chain inefficiencies.

Moving to Slide 6 now. GMF's total revenue grew 15% to $128 million in the first quarter, comprised organic growth of 9%, a 1% positive impact from palladium and a 5% tailwind from FX. From a mix perspective, chemistry revenues grew organically at 11% and equipment revenue declined slightly in the quarter. These organic growth rates indicate the recovery of the global automotive market, but also shows our leading positions strongly growing Chinese market. As Geoff mentioned, we see sustainability focused solutions as a key growth driver for Atotech. So our current R&D emphasis aims to provide new and more sustainable solutions for the growing electric vehicle market as well as the solar and wind energy industries.

Turning from revenue to earnings. GMF adjusted EBITDA recovered powerfully to $35 million in the quarter, and the adjusted margin was 27.2%. The growth in adjusted EBITDA reflects our leverage on the organic revenue growth, offset by the increases seen in freight expenses and additional inflation associated with the supply chain inefficiencies encountered this quarter. As mentioned earlier, we think that we will continue to see some headwinds from the supply chain disruptions, at least for the current quarter.

Now let's move to Slide 7. We generated a solid level of free cash flow despite seasonal working capital effects and some extraordinary impacts, including the accrued cash settlement of the transfer pricing audit in China, the ramp-up of our Yangzhou production facility in additional safety stocks. As a result, at quarter end, we had $213 million of cash in the revolving credit facility with $233 million available. So in total, a liquidity of $445 million, which provides a comfortable position in any scenario.

As we used our IPO proceeds to delever, and we continue to show our ability to generate strong cash flows, our net leverage has improved to 3.7x our adjusted EBITDA. As a reminder, we used the net proceeds of the IPO to completely pay off the $220 million balance of our holdco notes and the $420 million outstanding of the senior notes. Following our public listing in March, we are also very successfully refinanced our outstanding senior secured credit facility with a new USD 1.35 billion term loan, a EUR 200 million denominated loan and a $250 million multicurrency revolving credit facility. We're very pleased that we were able to secure very competitive interest rates for our new term loans, which will mature in 2027, thus significantly reducing our capital costs. Also, the strong business performance and lower leverage allowed Moody's and S&P to upgrade their ratings for Atotech to B2 and B plus, respectively.

Moving on to Slide 8. Coming to our 2021 full year guidance. After our first quarter as a publicly listed company, I'm pleased that the outlook for our business allows us to raise our guidance range. Just 2 months ago, we expected a growth range of 10% to 12% for the total revenue. We now raised that to 11% to 13%. While some of our Q1 growth rates look stronger, please remember that the pandemic effect started in China in Q1 2020. The rest of the world followed the second quarter 2020, but China, our most important sales market, recovered quickly in the back half of the year. So although we are lapping easy comparison quarters now, the comparison base becomes more difficult later in the year.

Moving on, when we come to our key performance indicator of organic revenue growth in chemistry, we move our expectations for electronic chemistry up to the higher end of the range and also raise expectations for GMF chemistry by a percentage point. This allows a forecast of approximately 9% organic growth in chemistry revenues. We are raising our guidance for the full year for adjusted EBITDA from between $405 million to $425 million to a range of $415 million to $435 million, which increases growth at the midpoint by nearly 3 percentage points to 17%. This reflects an increased confidence in our top line growth potential as well as the benefits from operational improvements.

Our underlying assumptions for our guidance are as previously, the 6% global GDP growth forecast from IMF, end market expectations of agencies such as IHS Markit and IDC, the continued recovery from the COVID-19 pandemic and March FX rates for our major currencies. Our CapEx guidance remains unchanged at approximately 4.5% to 5% of total sales in 2021. With about $10 million of this investment triggered by the construction of our new manufacturing facility in Mexico, which will help us to drive growth in the coming years.

As we communicated to you in March, our guidance for interest expenses already anticipated the refinancing activities. Therefore, we confirm that the range for normalized interest expense is anticipated to be between $70 million and $74 million for the year. This is based on our new capital structure that does not include onetime costs related to our refinancing activities. Please note that the refinancing has triggered roughly $59 million in onetime costs connected with the early extinguishment of our holdco and opco notes as well as the financing fee amortization. All of which were recognized in the first quarter, but is not reflected in our full year interest expense guidance. Finally, our effective tax rate, which includes income and withholding taxes, should be unchanged at around 30% to 31%.

Looking forward to the second quarter of 2021, in keeping the effects of lapping the worst pandemic quarter in mind, we feel confident in expecting organic total revenue growth for the second quarter to be comfortably above 20% compared to the second quarter 2020. Given our strong operating leverage and assuming exchange rates as of the end of March, this should give us an adjusted EBITDA growth of around 50%.

With that, I think we can open the floor for questions. Operator, please?

Operator, can we please begin the questions?

(Operator Instructions) And your first question comes from the line of P.J. Juvekar from Citi.

Yes. A lot of people are talking about chip shortages. And the chip companies are responding with some massive CapEx. And as they build out these new foundries, what does that mean for your EL chemistry and equipment business? I know equipment was up 77%. Do you believe that you need to add capacity along with the foundries as well?

P.J., thank you very much for the question. Yes, indeed. And we commented that we've only seen a slower revenue growth in Q1 because of this. As you say, new foundries are being added. This is helpful to us because the foundry capacity is generally being added at the leading edge, which drives the leading interconnect and PCB and semiconductor-related packaging technologies, which have given us good tailwinds in this quarter and will continue to for the year ahead.

The equipment growth you've referred to was predominant some with expansion of capacity, but very often, it was technology additions precisely into that market to support the packaging of the semiconductors as these expansions go underway. So it's very good news for us that capacities are going to be added around the world in these areas. Because as we've discussed with more -- before with [most of them] running out of steam, a lot of attention is going to the packaging and our leading-edge solutions, particularly into the smartphone and packaging markets where we are seeing this as a good growth driver. Thank you for the question.

Great. And if I may ask 1 more question. The software company you bought, what exactly does that software company do? Is that an enabling tool for customers? Or is that a revenue generator in and of itself?

Thank you. The software company we bought with about 80 employees, many of whom are in Minsk, Belarus, is closely integrated today with generating the software to make our equipment solutions run. It was previously doing that, and we bought the company that was helping us with this. So that will continue. However, we're adding headcount and resources in order to move into other solutions like the IIoT, I mentioned, so that we can put dashboard solutions, help customers with predictive maintenance, helps them with dashboards to reduce their cost of ownership on our equipment and drive efficiencies. So we'll be expanding into those areas, which I think will significantly differentiate our leading-edge equipment. So that's the purpose of this. It maintains what we've already done on custom software for equipment, but it will expand into other related areas and services as well.

And your next question comes from the line of David Begleiter from Deutsche Bank.

This is Katherine Griffin on for David. So first, if we could just talk about some of the strength in Electronics in Q1. Can you talk about what drove the upside there? How sustainable that growth is? How sustainable the margins are, and kind of how we should think about that in terms of expectations for Q2?

Why don't I start with the overall strength of the Electronics market, and Peter can comment on Q2 after that. So what drove it, I think, is the current strong strength sense of recovery. In 5G, for example, we're in the first year of an approximately 5-year rollout. We're seeing increasing adoption for 5G smartphones and more 5G smartphones are now being produced with millimeter wave really still to follow.

So currently, we're only accounting for about 35% penetration of smartphones in 2021, which is very much in line with earlier predictions. So we're also supporting 5G base stations. We're also seeing very good growth. We previously said we grow at twice the rate in semiconductors for general printed circuit board area, and in quarter 1, we exceeded even that. And the reason is because of these high-density in connect and chip packages, which require very advanced chemistry in order to make these packages work. So these are good, strong tailwinds, which will run, I think, for several years. Peter, would you like to take up anything on that question?

Yes. Maybe just a comment on margin. As you mentioned, it's -- we see a very strong margin. You see that we had an increase in margin driven by our strong growth rates, and in fact, diluted by a higher equipment business. So if you pull that out, the margin on a gross effect would be even higher. And for the second quarter, we continue to see growth rates based on the strong secular growth trends in the market and with a very strong innovative position.

Great. And if I could just follow-up on -- could you just speak more about your expectation for raw materials and how you expect to offset that with price either for the full year. Can you just speak to any raw material availability issues you may be having? Any color would be helpful there.

Yes. So first of all, just want to remind that we have a very effective contractual pass-through for precious metals like palladium, where we pass on automatically the pricing volatility to our customers. We see currently with the supply chain disruptions and shortages that price go up in many areas as well. We addressed that and also for other materials with a minimal time like are able to pass it on to our customers. And again, we're working very strongly to bring the supply chain back into a normal order. We expect some issues still to remain in the current quarter, but are confident that over time, we see some easing of the supply chain issues. Does that answer your question, Katherine?

Yes.

And your next question comes from the line of Josh Spector from UBS.

When I look at your first quarter performance and the way you're talking about second quarter, I think incremental EBITDA margins, excluding metals, they look like almost about 50%. And I guess your implied second half guide is a pretty big step down from there. So what changes first half, second half, that incremental margins change so much? Or is there some conservatism kind of in that second half margin guidance?

Well, I think on -- when you look at the second quarter, we continuously see strong growth rates. We continue to see a strong conversion of sales of -- particularly of our chemistry business into margins. Please keep the mix effect in mind. Please also notice that we expect a very strong second quarter with equipment business, which naturally runs with a smaller margin.

And your next question comes from the line of Arun Viswanathan from RBC Capital Markets.

Congrats on the good start here. Just curious to get your thoughts. Could you describe a little bit more on some of the secular growth in 5G and cloud computing? I know that there was some pickup last year because of COVID potentially as well. Does that put you in a little bit of a tough comparison as you move forward? Or is that growth kind of above your expectations?

Yes, the growth is mostly in line with our expectations, except for the base stations, I would say, where related business hasn't picked up yet mostly because the major manufacturer you can get is changing the design to improve power consumption and new orders for the infrastructure will be rolled out in H2. But other than that, I think we are pretty pleased with the 5G rollout on smartphones. It matched our expectations. We're seeing more and more smartphones being introduced by leading smartphone companies in China, and we are a plan of record in packaging technologies for the majority of these. So we're in good shape, I think.

We have seen a bit slower rollout than we might have expected on millimeter wave just because the infrastructure isn't there. But when you look at the complexity of some of these antenna and packages for that kind of application, we're extremely well positioned with our chemistry into those. So we'll benefit from those as millimeter wave starts to roll out later as well. So otherwise, they're pretty much in line with expectations.

Great. And just as a quick follow-up. Apologies if I missed this, but could you just address palladium? I know that it's typically a pretty robust pass-through. But is there any concerns on inflation there that you have?

So no, you're right, we pass palladium through -- sorry, Peter, you can answer.

No, I think we've continued to have a very effective contractual pass-through. This is still in place and works very well. So we don't have any time gap and pass on the higher pricing to our customers. And we outlined the effect with when you look at the presentation, exactly what we see as an uptick on our sales.

Our next question comes from the line of John Pitzer from Crédit Suisse.

Congratulations on the strong results. Geoff, I'm just kind of curious on the revenue guide. You're raising the full year by less than what you beat Q1 and presumably, Q1 was impacted by supply constraints that are likely to get better throughout the year. So I'm just kind of curious as to, one, how much of a hit were some of the supply constraints directed in direct to your business on the calendar first quarter? And how do you see those sort of progressing throughout the year?

Well, I think, first of all, John, I think it's important to notice the overperformance also related to FX and substantial growth. I think we are very much and very well converted the higher growth into a higher guidance for the full year. We see that there is some smaller negative impact on the overall automotive market for the year, which we see now volumes moving from '21 to 2022.

But we also see, on the other hand, that markets outside the automotive market are growing very well, growing above our expectations. In addition, as we said, we were able just to move our expectations for Electronics to the upper end, what we initially thought, as we see higher growth rates in smartphones, higher growth rates, particularly also for PCs for demand being triggered by work from home.

And John, I'd just add that we just replied that -- we've managed, I think, the supply chain issues very well. There were some shortages in some places. We managed to bypass them. Where we had multiple containers stranded because of Suez, we were able to get shipments out by air. It increased our cost slightly, but the priority is obviously to keep our customers satisfied. So that will be working through, I think, by the end of the second quarter.

That's helpful, Geoff. And then as my follow-up, clearly, in the Electronics business, if you look at the semiconductor industry, there's a clear drive for regionalization or domestication of semiconductor production along national security lines. And I'm just kind of curious, when you think about the supply chains to which you play into, what would be the impact to your business if we saw supply chains become a little bit more sovereign and a little bit more redundant. How do I think about that from your need to kind of change your geographic footprint or for your customers to change their geographic footprint and what that might mean for your business?

Thank you. The short answer is we're fairly agnostic to these. We've got a very good global structure. We've got supply chains that are built and supplying our 14 factories regionally. We have worked very hard over the years to avoid -- over the last 5 years to avoid what were quite a few single sources. So we've dramatically reduced those now, so that we have much better qualifications in local areas. Where we do see business moving around, for example, out of China into Vietnam or into Malaysia, we're able to follow it with our teams, both on the supply and demand side. So I think it's an Atotech strength actually that we have a remarkable purchasing and supply and customer support facilities in all major regions of the world where this matters. Perhaps the 1 exception was Mexico, where we're now building a new plant.

And your next question comes from the line of Laurence Alexander from Jefferies.

Two questions. First, when you're selling into a new fab, when you consider the mix of products that they're developing, is that going to be neutral or positive or negative to margins relative to your current business? And secondly, you mentioned sort of some new services that you're excited by. Should we think of this as an example of the Atotech culture at work and its constant renewal in the business? Or is this something which we should be -- start tracking as a kind of new initiative that represents a departure and an improvement in the business?

Thank you, Laurence. On the first one, I think it's positive that as new fabs are being built, the mix helps us because of the qualifications that we're doing on interconnect and packaging. So we do better at the leading edge. We consciously disconnected from things in general, like dual damascene, a few years ago and have concentrated on connecting and packaging and HDI. So this is -- this gives us a much better mix and position and will help our margins in the new fabs going forward.

With regard to the new services we mentioned, I was primarily referring to software services though and I think the way to look at it is not just the general Atotech constant renewal. More departure into new ways that we can drive differentiation on our equipment and services for the support of that equipment and improved chemistry utilization. So it's not large today, but over the next 5 years or so, I think it is worth tracking as a significant improvement to our business.

And if you don't mind, and I can't help it, can you give a sense for how large you would like it to be as part of your business in, say, 5 to 7 years?

I led myself into that, didn't I? Look, we -- I don't know it today. Peter, do you want to comment? We've previously said it could be in the range of $50 million, this kind of thing in sales. And I think that's the kind of a ballpark I'd give you today.

(Operator Instructions) And your next question comes from the line of Jeff Zekauskas from JPMorgan.

It's Silke Kueck for Jeff. Can you quantify what the mix price benefit was as part of your organic growth, both in Electronics and in GMF?

Well, again, I think it goes back to pretty much difference we have with chemistry margins versus equipment margins. And as we have pointed out earlier, we're running some kind of a razor blade model where we have competitive prices out for equipment solutions with very strong margins for our chemistry business. And as the equipment business growing very strongly in the first quarter also coming up very strongly in the second quarter, you see a dilution of the margins. The underlying chemistry margins are very strong. And if you also pull out the palladium price pass-through effect, in fact, they benefit from high growth rates and from the organic growth.

So it's all of the organic growth volume? Or is any of the organic growth related to mix or price?

No. We -- predominantly coming out of volume. It just can assume pretty much a flat pricing going forward.

Secondly, like it seems that what normally happens in the first quarter in China is that there's maybe -- maybe it's like a week or 2 weeks of production is usually slow, maybe it shuts down because there's the Chinese New Year and people travel. But this year, like it didn't happen. And so like it is as if you have -- like it seems for many of the companies, it's like you had like an extra week or 2 of production, you normally wouldn't have. Do you have that same experience? And can you quantify like how much of a benefit that was to your growth in the first quarter?

So you're absolutely right. We worked hard through Chinese New Year, particularly our equipment factory was working flat out. We -- our employees were actually happy to do this because restrictions meant that they weren't able to travel home as much as in previous years. So we got some benefit from that. And as you've seen in our results and commentary, our chemistry business continued to grow nicely in China during this period. So it was all hands on deck.

And then if I can ask a last question. Are you -- do you typically calibrate your palladium purchases when there are price swings? Like I understand you can pass it all through, but is this the case that as palladium prices rise that you buy a little less and you sort of like make up the purchases like later in the year?

Well, we don't have any speculation in there. We've purchased what we need for production and passed exactly the price which we incur for production onto our customers. So again, I think there's no lack -- there's a medium pass on to our customers.

And your next question comes from the line of Ben Kallo from Baird.

Congratulations. Maybe some bigger picture questions. You guys are new to the public markets, and I think it helps to reframe it. I've heard you say the equipment sales are going to be dilutive to margins a couple of times in the call. But could you talk to us about how those equipment sales help for visibility and then the lag time between the equipment sales and then when we see the uptick from the chemical sales is my number one question. And then number two, we focus a lot on 5G as a driver. Coming from my area of focus, what is electrification of vehicles as a driver and how you could frame that as well as energy, I say new energy, but it's really energy now, solar and wind and your exposure there. And I'll leave it at that.

Ben, thank you very much. On your first question, typically, we're almost fully booked on equipment at the moment. And that's both because of expansion and new technology increases. The lead time and lag on those is that we get an order. Typically, it takes us 6 months to manufacture and 3 months to install and then 3 months to commission. So the lag is about 12 months from when we first get the order to when we're putting in chemistry, commissioning the line, and then depending on the size of the line, that chemistry will continue over the lifetime of the equipment. So it's roughly a 12-month leading indicator from when we get the orders to when we're deriving chemistry revenue.

On your second question, thank you for those. As 5G is obviously a good driver for electrification of vehicles, we believe we get about 30% more vehicles from electric -- hybrid and electric vehicles. This is driven by increased context, increased lightweighting plating of plastic components, a variety of sensors and so on which provide good business and tailwinds for us. Similarly, in the solar and wind area, and the wind power, as I touched on in the presentation, we provide materials that are good for corrosion protection in salt water environments for offshore wind generation, for example. And this business is growing very nicely for us with some corrosion protection electroplating materials.

For solar, we've got several applications, but the big one I touched on is that today, the connection's made with silver paste. The trouble with that is it can be quite brittle and on installation if somebody say walks on top of the panel, it can crack. So we've introduced a range of which we're starting to increase nicely in sales and getting a lot of attention is for copper electroplating to put down those lines instead. They're more ductile. They don't crack when they're slightly bent. And they're also cheaper to manufacture, and they can have longer durability as well. So these are some examples of where we're using drivers in alternative energy as well. And I think they'll be good drivers for us in the years ahead. I hope I answered your questions.

Yes. If I could sneak 1 more in. I guess, if I boil it all down, you guys have significant areas to deploy capital. And you have this successful IPO. I'm just wondering how you guys think about your balance sheets and all the opportunities you have and the capital allocation related to it.

Yes. I think the -- let me answer that. I think our capital allocation rules really haven't changed. And the key focus is to support organic growth. We see great potential to grow organically. We might have bolt-on acquisitions in the range as we had previously, but a key focus for us is really to delever to the range between 2 and 3x as we have indicated to the market. And I think that's the capital allocation priorities we set and we continue to follow.

And your next question comes from the line of P.J. Juvekar from Citi.

Jeff and Peter, a couple of questions. First, in -- you mentioned that you have higher sales -- third higher sales in EVs compared to ICE cars. What's your market share in EVs versus ICE?

P.J., it's a fair question. I don't know how to answer that off the top of my head. I can't give you the relative market shares. I would just say that we are improving on market share on EVs slightly because of the different applications and because of the work we've done with OEMs, but I would hesitate to give you actual numbers. Sorry.

Okay. No, that's fair. And then you talked about the IIoT market and coatings for those, I guess, I'm not very familiar with that market. How big is the TAM there and who do you compete in that space?

So we see this as a very significant driver because of all the sensors and because of the connectivity. And we're getting multiple inquiries for this area. It ranges from high-end (inaudible) type of things, to sensors, pressure sensors, materials that are required for generating sensors and the software to integrate them in as well. And when I referred to IIoT in the comments, I was mostly referring to the software area. But with the ubiquitous rise in sensors into this kind of area, we're very well placed with the kind of the electrification of everything. And so we see this as a good general driver. Just to remind you, in GMF, only about half our business is in automobile, and the rest is in a wide variety of industrial coatings. And we have widespread applications through our PCBs and semiconductor packaging beyond 5G into multiple applications of this area. So it's a good general growth driver for us.

And there are no further questions at this time. Presenters, I'll turn the call back over to you.

Thank you very much, operator. So everybody, thank you very much. I'd like to thank everybody on the call for the questions and your attention and interest in Atotech. If I may, I'd just like to summarize the key points from today's call. Supportive end markets and the investments we've made in our technology and products have led to a record quarter. As the world recovers from the pandemic, we know it won't be a straight line, but the fact that we did not scale back during the hard times is now serving us well as I believe we are very well positioned to capture future growth in new technology trends today. Our recent refinancing and stable capital structure provides a solid base from which to generate free cash flow and fund future growth. Atotech is a key enabler of the information age value chain, as we've just discussed, and we believe that our growth will continue to outpace that of our end markets.

And if I may, I'd like to close with my deepest thanks to the entire Atotech team around the world, your hard work, energy and commitment are inspiring, especially in the face of the continued pandemic and the supply chain issues we've recently seen. You are what makes Atotech a cutting-edge company after over 100 years of existence. Quarter 1 2021 has been our first quarter as a public company and an excellent demonstration of why we believe we will become one of the world's most respected specialty chemicals company.

With that, thank you very much, everybody, and we'll end the call.

And ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.