Atotech Ltd (ATC) 2020 Q4 法說會逐字稿

Good morning, and welcome to Atotech's Fourth Quarter 2020 Earnings Conference Call. Today's speakers are Geoff Wild, Atotech's Chief Executive Officer; Peter Frauenknecht, Atotech's Chief Financial Officer; and Paul Goldberg, 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 will now turn the call over to Mr. Goldberg. Please go ahead, sir.

Thank you, Sylvia. Good morning, everyone, and thank you for joining Atotech's initial earnings call as a public company. 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 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 Atotech by referring to our recent 20-F filing for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statement. Also, we undertake no obligation to publicly update or revise forward-looking statements, except as required by law.

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

Thank you, Paul. And good morning or afternoon, and happy Chinese New Year and Year of the Ox to you all.

Before we get started, I just want to let you know how excited we all are to begin our journey as a public company. Our team members, customers and other partners have long been aware of the innovation and value we bring to our markets. We're delighted that we can now share our story with a wider audience and look forward to engaging with you on a regular basis.

With that, let's begin on Slide 3, please. We are very pleased with our fourth quarter performance. We leveraged the continued strength in our electronics end markets as well as the ongoing recovery in global automotive markets to deliver organic chemistry growth in both segments. Organic chemistry growth was complemented by strong growth in our electronics equipment business, resulting in overall organic growth rate of 9%. We also grew adjusted EBITDA, improved free cash flow and reduced leverage in the fourth quarter. Peter will share these details as well as our 2021 guidance later in this presentation.

But perhaps even more important than our strong finish to 2020 are the initiatives and decisions we took during the year and even before then, which have well positioned us for what we believe will be a very constructive market in 2021. All through 2020 and despite the challenges of the pandemic, we continued to invest in the long-term best interests of our business, especially regarding our footprint and technology.

Now as we begin the new year, I'm happy to say that several initiatives are bearing fruit, including our recently completed new production facility in Yangzhou, China, which is now fully functional. This facility is our second chemistry plant in China. It will provide additional capacity to serve the large and growing electronics and general metal finishing markets in the east, north and center of China. It also creates important operational redundancy with our larger chemistry production site in Guangzhou.

The investments we've made in R&D and digitalization are also paying dividends, including our focus on delivering new and innovative solutions connected to next-generation semiconductor packaging. As one example, our advanced Spherolyte Cu UF3 chemistry has been developed for the specific needs of next-generation fan-out wafer-level packaging. Its superior purity ensures that our customers have the highest reliability with no cracks or micro voids. Volumes are ramping up for other UF3 chemistry applications as well.

Another example is our market-leading Uniplate equipment line embedded in the semiconductor packaging supply chain. This equipment is used in ultrathin production applications within the high-end IC substrate manufacturing process as well as for the production of leading-edge smartphone components. And as we've communicated before, these installed lines will pull through our chemistry over an extended period.

Another important area of investment for Atotech is digitalization. Our 2020 acquisition of Visutech enabled us to quickly expand our digitalization capabilities, speed up production development time and build a software-based business model. We are aggressively pushing towards commercializing a suite of tools that will enhance production quality, efficiency and system availability for our customers while, at the same time, reducing cost and creating stickier customer relationships for Atotech. No one else in our industry is able to provide chemistry, equipment, software and leading-edge global service, and we believe this is a sustainable competitive advantage.

Now let's talk about the current state of our markets in a little more depth. Within Electronics, demand for 5G infrastructure, networking equipment and service is very solid, driving demand for chemistry to manufacture high-frequency PCBs and high-performance semiconductors. Additionally, the semi packaging space is extremely strong, and we're benefiting from our focused investments in this area over the past few years. The evolution of semi packaging is leading to more plated layers at the wafer level and more plated layers at the IC substrate level, all of which are positive for Atotech in terms of content and chemistry value.

The market is experiencing strong growth for GPU and CPU chips, which in turn is driving strong IC substrate growth. In fact, a recent forecast said semiconductors will grow about 8% annually from 2021 through 2024, and fan-in/fan-out and 2.5D packages will grow around 10% annually over the same time frame. 3D packages could grow over 20% annually.

Now regarding smartphones, Gartner recently forecasted that worldwide unit shipments are expected to be about 1.5 billion in 2021 or 11% growth over 2020. Within this total, 5G smartphone units are expected to reach over 540 million units, up from about 213 million in 2020. Atotech gets roughly 50% more revenue on a high-end 5G phone versus an average 4G phone, so the growth in the market, compounded by the overall growth of 5G, is a great setup for us.

In addition, demand for electronic automotive products is rapidly improving despite temporary near-term chip shortages that are affecting OEM production schedules. We believe these problems created by surging demand will work themselves out in the coming quarters.

In GMF, we are pleased that the global auto markets, led by china but broad-based, have continued to show sequential improvement from the pandemic-driven low point in the second quarter of 2020. As we begin 2021, we expect strong growth in virtually all our GMF served markets but particularly in the global auto markets, reflecting a strong rebound off a low base but also from multiple secular drivers.

Among the more impactful trends are auto premiumization, electrification and lightweighting and sustainability. On the premiumization front, we're seeing solid demand for our decorative and functional chemistries used in advanced exterior and interior design applications as well as in corrosion protection and wear resistance applications, all of which contribute to vehicle safety and longevity. Regarding electrification and lightweighting, we see further high-value chemistry demand fueled by our OEMs' growing use of new plastics and lightweight metals and related new challenges like contact erosion. And with respect to sustainability, we expect secularly increasing demand for Chrome VI-free chrome plating processes driven by strict environmental regulations such as REACH and continued global demand for new chrome colors enabled by Chrome VI alternatives. Here, Atotech's products like TriChrome, BluCr and Covertron address these customer needs and at the leading edge of technology for this space.

Finally, we also expect very solid demand in other GMF markets like sanitary, household appliances and construction. In addition, chemistry used in applications like solar panels and wind turbines should continue to grow as the world continues to evolve towards green energy. So in summary, we see a very constructive demand environment across our portfolio and expect 2021 to be a good year of growth.

With that, let me hand over now to Peter for a review of our financials and our 2021 guidance, and I'll be back with some closing comments after he's finished. Peter, over to you.

Thank you, Geoff. Good morning, everyone. I'm very excited to go through our strong Q4 financials with you for the first time as a public company.

Let's start on Slide 4. As Geoff said, we were very pleased with our fourth quarter results and believe that we were once again able to outperform our underlying markets. Our teams did a great job of delivering results in dynamic markets, continuing to service our customers at the highest level while carefully managing costs.

For the fourth quarter, our total revenue was $365 million, an increase of 18% over the prior year, including organic revenue growth for chemistry and equipment of 9% as well as an FX tailwind of 4% and a 5% benefit from palladium pass-throughs. Organic chemistry revenue, a key performance indicator, increased 5% in the fourth quarter and reflects growth in both segments.

Electronics was very strong and grew 14% organically. Secular drivers like 5G infrastructure, next-generation smartphones, cloud computing and evolving technology in semiconductor packaging are propelling sustained growth as seen during the last few quarters. We'll go deeper into Electronics in a few minutes.

GMF posted revenue of $133 million, representing 7% growth over the prior year. We were pleased to see GMF return to growth after several quarters of year-over-year declines. GMF organic revenue growth of 2% was largely driven by rapidly improving industrial production, especially in the global automotive sector.

High palladium prices contributed $40 million to our top line while a weaker U.S. dollar positively impacted our sales with $12 million. Palladium continues to rise and was up about 25% in the fourth quarter 2020 over the fourth quarter 2019. As a reminder, changes in the price of palladium directly impact our chemistry sales as a straight pass-through to our customers but do not meaningfully affect EBITDA, resulting in some impact on reported relative margin mathematically.

Moving to the P&L. We generated adjusted EBITDA of $106 million in the fourth quarter, which exceeded our expectations heading into the quarter and was a $5 million increase over last year. Overall, our solid Q4 EBITDA result was driven by earnings on strong organic chemistry growth, stable pricing, productivity and our focus on cost management, offset in part by increases in compensation accruals in the quarter, reflecting our stronger full year performance. We believe our positioning as a critical supplier in the electronics value chain now focused on the high end of our markets will enable us to drive earnings growth moving forward. We also had a modest benefit from FX in the quarter.

Adjusted EBITDA margin was 29.1% in the fourth quarter. The margin was impacted by the mathematical impact of palladium pass-through, the mix of equipment versus chemistry and by the increased compensation accruals, partially offset by cost controls and productivity. Excluding palladium, product mix and the accrual increase, adjusted margin was essentially flat with last year. Our margin continues to be amongst the highest in the specialty chemical industry and illustrates the quality of our business.

Now let's go to Slide 5 for a deeper look into the Electronics results. Our performance in Electronics accelerated in the fourth quarter with total revenue of $232 million, increased 25% year-over-year. This very strong result included organic growth of 14%, a favorable palladium impact of 5% and a 5% benefit from FX translation.

Organic chemistry revenue for Electronics grew 7% in the quarter, reflecting continued solid demand for our innovative electronic chemistry solutions. Customers are still gravitating towards our higher value-added chemistries as they continue to ramp up for 5G and for using complex PCBs, semiconductor packaging, IC substrates and even in high-growth consumer wearable applications.

Our market-leading broadened offering of plating lines, including Uniplate and the recently introduced POLYGON drove equipment revenue up 56% over the prior year. Quoting activity for electronics equipment remains quite strong, and we are basically sold out for the first half of 2021. Encouragingly, we expect the second half to be busy, too, plus we get the benefit of incremental chemistry pull-through as the equipment comes online.

Electronics generated $70 million of adjusted EBITDA in the quarter, a $6 million or 9% improvement over the prior year period, primarily driven by the higher organic revenue, stable pricing and tight cost control. Margin was 30.2% in the quarter, primarily reflecting the pass-through impact of palladium, product mix and the increased compensation accruals regarding the product mix, we had strong growth in equipment, which carries a lower margin by nature, but serves as an enabler for future high-margin chemistry revenue. Adjusting for these items, margin was largely consistent with last year. Our best-in-class margin for chemistry is sustainable and speaks to the strength of our business and the value we provide our customers.

Moving to Slide 6 now. GMF's total revenue grew 7% to $133 million in the fourth quarter, comprised of organic growth of 2% and a 3% positive impact from palladium and a 2% tailwind from FX. From a mix perspective, organic chemistry grew 3% and equipment revenue was slightly down in the quarter. As already discussed, we were very pleased to see organic growth swing positive in the quarter after the market challenges we faced in light of the pandemic, especially in the second quarter of 2020. Our solid fourth quarter performance is mainly attributable to rapidly improving global automotive markets, continued constructive sanitary markets and from growing interest in our sustainability-focused suite of solutions.

Turning from revenue to earnings. GMF adjusted EBITDA was $36 million in the quarter and adjusted margin was 27%. Adjusted EBITDA was flat with last year, reflecting earnings on organic growth essentially offset by the previously mentioned increased accruals. Adjusted margin, excluding the impact of palladium and accruals, was largely in line with the prior year period. These results are amongst the highest of all specialty chemical companies serving industrial markets, and we believe they will improve as our underlying markets continue to strengthen.

Let's now move to Slide 7. 2020 was a good year for cash generation for Atotech. We generated adjusted free cash flow from operations before debt service of $120 million in the fourth quarter, up 15%; and generated $262 million for the full year. This strong performance enabled us to repay $80 million of our holdco notes in the fourth quarter. Also, at quarter end, we had $549 million of liquidity and improved our net leverage to 5.1x. We believe this performance is very indicative of the company's ability to deleverage around 0.5 turn per year going forward. We feel very good about the way we navigated through the pandemic, which showed the stability of our business and our cash generation abilities.

More important than how we finished the year is where we are now post the IPO. As you know, we completed the IPO on February 8 and sold 23.3 million shares at $17. The gross proceeds to Atotech were $498 million before deducting the underwriting discount and offering expenses. We used the net proceeds, some cash and borrowings under our revolver to completely pay off the $220 million balance of holdco notes and the $420 million outstanding of opco notes. As a reminder, the holdco notes carry an interest rate of 8.25% and the opco notes' interest rate was 6.25%. Post the IPO closing, pro forma net leverage was reduced to 3.9x.

Now as we move forward, we are actively engaged in a process to refinance our existing term loan facilities. We expect to take advantage of our lower leverage position, recent upgrades by S&P and Moody's and our strong business outlook to lower our cost of borrowings. We do not have any details to share yet, but we will communicate them once the final transaction is complete.

Moving on to Slide 8. Now let's quickly review our 2021 guidance. As Geoff mentioned before, we expect 2021 to be a year of strong organic chemistry revenue growth in both segments. Our expectation is that this will also result in double-digit EBITDA growth.

Total organic revenue is expected to grow 10% to 12% in 2021, led by strong organic chemistry growth and double-digit equipment growth. Organic chemistry revenue, our key performance indicator, is expected to be up 8% to 9% for the full year. Electronics is expected to be up about 6% to 7% on broad-based secular strength, and GMF is anticipated to increase approximately 11%, driven by strong global automotive markets and the low base in 2020.

Adjusted EBITDA is forecasted to be in the range of $405 million to $425 million, representing an increase of 14% over 2020 at the midpoint. This adjusted EBITDA guidance reflects leverage on organic chemistry growth, the benefits of operational improvements as well as some FX translation gains which we expect in the first quarter 2020 (sic) [2021].

CapEx is expected to be between 4.5% and 5% of total sales in 2021, with about $10 million of this investment triggered by the build-out of our new Mexican manufacturing facility. Normalized interest expense is anticipated to be between $70 million and $74 million for the year. This is based on our new capital structure but does not include our refinancing activities. Please note that the refinancing will trigger roughly $61 million in onetime costs connected with early liquidation of our holdco and opco notes as well as financing fee amortization, all of which will be 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 around 30% to 31%. This rate needs to be applied to our operating profit. In other words, please exclude the EBITDA adjustments, in particular transaction expenses, restructuring programs and noncash adjustments as well as interest expense from earnings when you use this guidance. As a reminder, we do not have a meaningful tax shield on interest expense, and interest is therefore, for this purpose, excluded from taxable income. With respect to the first quarter, we expect organic chemistry revenue to be in the low double digits and for adjusted EBITDA growth to be, before the positive impact of FX translation, in the mid- to high teens versus the first quarter of 2020.

With that, allow me to hand back over to Geoff.

Thank you very much. As Peter outlined, we are forecasting good revenue and earnings growth in 2021. We have the right technology to address advanced semiconductor packaging, the high-density PCB market and the rapidly changing requirements connected to sustainable processes in plating. We believe these secular trends, combined with a strong cyclical recovery from the pandemic, puts us in a great position for 2021.

With that, I suggest that we now take some questions from our listeners. And after that, I'll make some final comments. Operator, we're now ready to open the line for questions.

(Operator Instructions) And your first question comes from the line of John McNulty from BMO Capital Markets.

Congratulations on a great set of results and guide just right out of the box. So I guess the first question I had was regarding cash flows as we look to 2021. You ended the year really strong in 2020.

I guess, are there -- when you think about like the working capital side of things, should we be thinking about, in general, that moving with sales as we look through 2021 in terms of kind of the magnitude of change there? Or are there other levers you can pull to either squeeze out cash or is there anything we should be thinking about, about the new facility in China? I guess, how should we be thinking about like the working capital outlook as we look to 2021?

Thanks, John, for the question. In fact, we had a great improvement in 2020 in terms of operating working capital. We expect to keep this very strong and efficient level going forward, and probably we'll grow along with sales with these levels. But again, I think it was a great achievement by the end of 2020, and we are able just to maintain these levels going forward in relative terms...

Got it. Sorry, go ahead.

Just in relative terms to sales.

Got it. Okay. No, that's helpful.

And then I guess, just in general, when we look at your business in terms of seasonality, 1Q is always a little bit lighter than the rest of the year. I assume that's largely because of Chinese New Year. I guess how should we be thinking about that this year, both based on what's kind of going on with regard to Chinese New Year, also with regard to like the semi issues that we're seeing with autos? Like is there going to be a little bit of a difference in terms of sequencing as we progress through the year? Or how should we be thinking about that?

Well, I think, first of all, we have the impact, as you said, from holidays, particularly Chinese New Year, at the beginning of the year. In Electronics, you have the new product cycles coming from major smartphone producers, which affect, of course, also the demand. So the first part of the year, typically in the first quarter is typically quite strong as well as the fourth quarter.

When we talk about 2021, of course, we need to look at the comps compared to 2020. And as you know, the second quarter in 2020 was particularly weak in GMF as COVID hit the western world in the second quarter. So we'll have a significant recovery expected in the second quarter 2021.

Your next question comes from Kieran De Brun from Crédit Suisse.

Again, congratulations on your first quarter as a public company. I guess you just touched briefly on this and John just asked something along these lines, but can you just speak to any impact that you saw in January and February that results -- that are resulting from automotive production delays due to semiconductor shortages?

And if you view this impacting -- I mean we talked a little bit about the cadence. I understand that 2Q is your easiest comp, but do you see any of that demand now getting pushed out into the second half, particularly at like -- a little bit of a weaker 1Q and 2Q? Or is that just the near term -- very near-term, temporary delay that you're expecting to flow through in the second quarter as well?

Yes. Thank you, Kieran. The -- I'd say that the chip shortage is primarily affecting the global auto markets. For electronics, for us, it's in the related PCB business. And in GMF, it's more kind of surface finishing related.

We think the shortage will probably reduce auto production by about 1 million units in Q1 and perhaps another 0.25 million or so in Q2, so it will affect both quarters. We -- based on the feedback we're getting from our customers, however, we think the shortage, which, as you know, is driven by high demand, will largely wash itself by the year-end. So our full year growth plans, which Peter touched on, remain intact.

That being said, yes, we think the shortage may put some type of cap on how high auto production could possibly grow. So we're watching it very closely. But offsetting that, as far as our GMF business is concerned, is we're seeing good growth in other areas like sanitary, where you may recall that automobile is only about half our GMF business.

Great. And then I guess, on the equipment side, you had a very strong quarter within Electronics but there's still slight weakness within the GMF equipment business. Can you discuss the backlog that you have within the GMF business and just on a high level, how we should think about incremental chemistry sales in both Electronics and GMF as your equipment is installed at the OEM facilities? I think you mentioned some pull-through of demand in the second half in Electronics due to the new equipment base, so any color you can give there would be appreciated.

Thanks. So as we've intimated, the growth in the backlog is mostly on the Electronics side of at the minute. That's because there's enough capacity in areas like plating and plastics for our GMF and some large equipment that was installed in 2019 going into '20. So most of the sales at the minute is around -- and the orders are around Electronics, which is very good, going into an order book for the first half of 2021.

In terms -- that Electronics growth is driven particularly by semiconductor packaging. Our Uniplate lines are selling particularly well because that's what's needed for production of high-density interconnect and semiconductor packaging. So the bulk of the orders going forward will be on the electronics side. However, we're seeing good interest in some of our new GMF equipment such as DynaSmart. We've launched this in the last 12 months, and we're seeing strong interest and first sales starting to come through now.

In terms of chemistry, it's not easy to give a straightforward answer because, when we sell a piece of equipment, it might pull something through like $300,000 of chemistry up to almost $1 million. And so the mix makes a tremendous difference. But in virtually all cases and particularly on the Electronics side, we typically get some contracts that come through along with the chemistry equipment that we sell. But I can't be more specific in terms of the actual pull-through on the average, but I hope that helps you, Kieran.

Yes. No, that's great. And congratulations again.

Thank you very much.

Your next question comes from David Begleiter from Deutsche Bank.

Geoff, on that same line of questioning, can you quantify the impact in Q1, do you think, from the auto -- lower auto production?

Yes. And I think, as I said, it will be 1 million units or something in terms of auto. We -- it will affect us by 1% or 2% possibly on GMF business in the first quarter. But that still gives us very healthy growth, about in double digits, so it's not really material to us. And we think even that loss will be picked up going into the second quarter and certainly by the end of the year.

And Peter, just on the cost side, can you discuss any cost headwinds and tailwinds you're seeing in '21 versus '20, i.e., incentive comp or some temporary costs that are coming back to the business?

Yes. David, as we said earlier, we face the typical inflationary impact in 2021 when wage inflation is kicking in again. We had some cost containment activities which might not repeat itself, and we started some growth initiatives. We ramped up our Indian development facility as well as our second Chinese chemistry plant. Being said that, we still believe that a major part of the additional margin is being converted into profit, and this gives us a nice improvement in 2021.

Your next question comes from Josh Spector from UBS.

Congrats again on the achievement here. Just broadly on the margin side, again, kind of a follow-up to a prior question, I guess. When I look at the incremental EBITDA into 2021, on your organic guidance, the margin there is around 50% almost. When I include FX, it's kind of in the mid-30s. I guess what do you consider normal?

Is 2021 a normal EBITDA leverage that you're seeing? Or would you think that there's something different that we should expect more in medium term, longer term?

So overall, we -- I think it's important to look at our margin mix, that we have a very strong margin on the chemistry side of close to 60%, and we convert that nicely to profits. The assumption is and we have shown that we were able to offset wage inflation every year by sustainable cost measures, and I see that also valid going forward.

We might invest part of the incremental EBITDA into growth initiatives, which we do in 2021, we might do also going forward. But still, this gives you a nice leverage and nice conversion of our margins into EBITDA.

Okay. And just on free cash flow, I mean, you're pretty clear in your tax guidance in terms of how to treat that and put that on operating income. I guess in light of your view of refinancing, I know you can't give a specific number, but how much room is there to improve on that over the next year? And how meaningful could that be to a free cash flow bump versus what you're expecting now?

Our current term loan has 300 basis points plus LIBOR and 100% -- 100 basis point floor. So it's virtually running at 4%. With -- when you look at our lower leverage and the recent upgrades we received by S&P and Moody's, I just expect that we are able to shave off a decent amount of that level, which I just said, and can build in some more efficiency into our capital structure. As soon as I have some more news and we completed the transaction, I will let you know.

I guess if I could just try to clarify. So in terms of the tax rate though and the cash taxes, would refinancing benefit that? Or is there something structural which wouldn't have an impact there?

Well, we don't have that much tax shield on the interest, so there's a limited impact on the tax.

Your next question comes from Jeff Zekauskas from JPMorgan.

You had very, very nice revenue growth in the fourth quarter in your businesses. And in describing it, you said if you adjust for palladium, product mix and compensation, the EBITDA margin was largely unchanged. Why wasn't it higher?

Was there some negative pricing effects? Or what helped it down? Why are your incremental returns the same as your average returns?

Yes. Jeff, as you said, we grew 5% organically with our chemistry business on an organic level. We also were able to improve EBITDA by 5%. Embedded here is the increase of the compensation accrual in the fourth quarter, which related to the full year and which had a negative impact. If you take that out, the increase in profit would have been higher.

Okay. So then as my follow-up, do you have a target for your normalized EBITDA margin? That is, do you think in 3 years it will be the same or lower or higher or higher by how much or lower by how much, assuming you hit your revenue target?

Yes. I think first of all, just a reminder that if we see increasing palladium prices, you will see some kind of dilution.

No, excluding that.

Yes. If we exclude that, we convert the growth into profits, and this will lead to improved margins over time.

Your next question comes from P.J. Juvekar from Citi.

On the 5G rollout, that's going to benefit you both from the handset side and the 5G infrastructure side. What innings would you say you're in, in this 5G rollout? And how much benefit can continue in 2022 and beyond?

P.J., thank you for the question. I would say that we've got a tailwind of several years. On infrastructure, it's well advanced in China with another 2 years to go with some infrastructure build-outs and still starting in America and of course, in Europe. And this is before sub-6, millimeter wave starts to be installed as well, which gives us some momentum beyond that.

In terms of 5G rollout, we're looking at about 20% of the handsets that are sold today will be 5G, and that will increase to about 80%, current forecast, by 2024. So we've got about 3 years of increasing 5G penetration in handsets. And as I mentioned earlier, it does provide a good tailwind for us because of the increasing complexity and extra layers that are required on these high-frequency boards and the penetration of new semiconductor packaging technology, wafer-level fan-out packaging as well. So the combined effect of that is we get about 50% more in a 5G phone compared to an average 4G phone. So we're going to see the continued effect of this, I think, until 2024 at least.

Great. And just related to that, another question. What -- how much share gain do you have in 5G versus 4G?

And then I'm sure your competition is not standing still and they are innovating as well. So can you talk about your competitive dynamic and sort of why that favors you?

Certainly. We made a decision several years ago to concentrate our R&D particularly on this packaging space, driven by the decision that, as Moore's Law was running out of speed on the wafer, the density would have to move to chiplets in the packaging, and so it has proved. And so over the last 5 years or so, we've particularly been concentrating on putting our chemistry towards the fine lines and spaces that are required particularly for the interposer on which these chiplets sit and are then packaged to get high density in the overall integrated package.

So this is a complex chemistry. It required multiple years of qualifications with the OEMs. It also requires some new equipment, which is why, as I referred to earlier, our Uniplate lines are selling particularly well.

So I think our competitive advantage here is OEM qualifications. We have plan of record with a very strong position in this particular area. We have good equipment sales, good chemistry follow-through in this area and really strong customer support and technical service support in those areas which are important for production, particularly Greater China. So I think that is a summary of our competitive advantage.

Your next question comes from Laurence Alexander from Jefferies.

Just a couple of things. First, can you give a sense by your key businesses, so the electronics, the automotive and then the other industrial, of the degree of actual visibility you have and how quickly you see inflections in demand or in order rates? And then secondly, when you build new plants, for example, the new Chinese capacity, how long does it normally take to fill out a plant?

Thank you, Laurence. In terms of visibility, it's variable and particularly at the minute because our customers are not always able to give us the amount of impact, for example, of the semiconductor shortages. We have 14 factories operating around the world, and the reason we have them close to our customers is because, in many cases, we can do same-day delivery or certainly same-week delivery.

So we work closely with the customers and have pretty good visibility, about 4 to 6 weeks ahead, on actual demand. This is also augmented because, in many cases, we're supporting and maintaining the bouts for our customers. On the electronics side, because of the longer lead times on semiconductors and particularly on front end of the work, we get much better visibility, in the region of 1 to 2 to 3 months, depending on the actual process.

In terms of manufacturing and our ability to scale up, we have plenty of capacity in the factories. As I mentioned, we've augmented this with a new factory in China. We're building a new one in Mexico. The -- when we need additional capacity, we can add, in general, extra shifts, and we're not currently impacted by many raw material shortages, although it's getting a little bit tighter in 1 or 2 areas. So we're not too worried about the capacity of our factories. And they are also fungible in the sense that, if we did have a problem at one, the same products are often qualified at different factories so we can move product around.

I guess maybe if you don't mind elaborating. The -- my impression was that capacity utilization is kind of a less useful metric for your business because of the way the plants work. So when you decide to add new capacity, for example, the plant in China, is it new functionality or new product lines that are tied to a particular industry or new skill sets that you're importing into a region? I mean can you just characterize what the point is of a new plant?

Thank you. Yes, I'd be happy to, Laurence. Thank you. When we made the decision to bring Yangzhou, we had enough capacity at our Guangzhou plant in the south. We were, however, worried that for one of our largest sales areas, we've only got 1 plant. So on grounds of redundancy initially, we decided that we would build an extra plant up in case either environmental regulations or local restrictions put pressure on us at the plant in the south. So we went ahead, and over the last 4, 5 years, we've completed the plant in Yangzhou.

Now that we have, we are accelerating the qualification with customers because the capacity is needed, both because of growth of customers in the Shanghai region, which is strong for us, but also because of coronavirus regulations at the minute, meaning that we can't do multi-point deliveries, for example, from our -- the delivery trucks out of the factory in the south. They have to make point-to-point deliveries, which is limiting our ability in some particular areas. So it's really a matter of redundancy plus local service. China being such a massive country, we wanted to have a factory very close to our emerging new customer base in the Shanghai delta region.

Your next question comes from Duffy Fischer from Barclays.

First question is can you just tell us what the new net debt number is pro forma for the IPO? And then in your comment where you said you're going to pay down about 0.5 turn of net debt ratio per year based on free cash flow, the math of that would say you're going to convert 1/2 of your EBITDA to free cash. Is that a valid number as well?

So let me just see whether I could give you the net debt number. Again, I think the leverage by the time of IPO was 3.85. I need to pull out the net debt number -- the final net debt number and provide that to you later on.

Okay. Fair enough. But the 50% conversion of EBITDA to free cash flow, is that a fair number?

If you take -- if you talk the adjusted free cash flow as we have defined it in the attachment, we see a 60 conversion -- 60% conversion of our adjusted EBITDA into free cash flow.

Okay. And off your guided adjusted EBITDA number, what's the D&A that's embedded in that number for this year?

I think it's -- the ongoing depreciation and amortization excluding the extraordinary write-off we had last year is around $180 million. But again, I think, if you go into our 20-F, you'll see the numbers excluding the extraordinary write-off we have taken last year in 2020.

No, I'm just -- in your guidance of $405 million to $425 million, I'm just trying to understand what's the embedded D&A in that number.

It's EBITDA excluding depreciation and amortization.

No, what I'm trying to get to is what is EBIT. So if you give us guidance of $405 million to $425 million, I just wanted to understand what's the embedded D&A number that's in that.

I think if you take the -- just the reference to 2020 excludes the extraordinary write-off. There might be some FX effect to be seen in 2021, but probably that then comes pretty close to the number when you calculate that, what you need to know for your reconciliation.

Your next question comes from Ben Kallo from Baird.

Congrats again on the first quarter out. Maybe can we just touch on the opportunity in sustainability, if you can group it like that? And then maybe just on the auto side, the opportunity there for both lightweighting and anything in higher electronic components per vehicle, how you see that. And if you could give dollar terms or any kind of data about who you're talking to or where those conversations are going, that would be great.

Thank you, Ben. Yes, on sustainability, you will be hearing a lot more from us, by the way, because, obviously, until a month ago, we were a private company. And we'll now be putting out some sustainability reports now that we're a public company and upgrading our communication in this area.

In terms of sustainability in auto, if I understand what you're doing -- your question, we are seeing generally about 30% improvement in Atotech sales as we move towards hybridization and -- hybrid vehicles and electric vehicles. That's driven a lot by the electric components, but it's also driven by things like lightweighting, where we're getting increased sales of things like plated plastics, ABS components that would have been or could have been metal before.

We're seeing good improvements in some battery plating technologies that we have available. We're seeing some good improvements in some premiumization. This is the chrome on the interior and exterior. That is coming along nicely and differentiating some electric vehicles. So overall, we see about a 30% tailwind as we move into this area. It helps us on several other areas on the electrification as well.

Your final question comes from Arun Viswanathan from RBC Capital Markets.

Congrats on the results. I guess the first question I had was -- obviously, we're early in the year and so it's expected to provide a range. But maybe you can just kind of give us some factors that would push you to the upper or lower end of the guidance range for the full year, the $405 million. What's embedded in the $405 million and kind of what's embedded in the $425 million?

Yes. Thanks, Arun, for the question. So overall, we believe that there are opportunities to outperform the market if the market remains constructive. Again, I think it's a matter of volumes. So the first place where we see strong volume growth is the first part of the year, and we were more cautious in the second part of the year.

But also, the second part is that we might be able to outperform if costs do not come back to our business as fast as we have modeled it. This relates, to one extent, to travel where we just planned for a certain travel budget with the travel restrictions. We might need to see when they are being lifted and when cost comes back to the business.

And lastly, I think, just to mention, we also see on the interest side, as I indicated, through the refinancing, an opportunity to improve our efficiency and reduce the interest expense going forward. So I think that's 3 areas where we see ourselves to have some opportunity in order to be able just to be in the upper end of the range.

Okay. And then on the leverage, now you're below 4 turns, so -- and you've indicated that you'll likely be in a position to delever about 0.5 turn a year. So yes, maybe you can just reiterate what you think target leverage is for the business and what you will do with cash to get there. And then -- or sorry, what you'll do with the cash once you get there?

Yes. Thanks, Arun. Again, I think a clear commitment on our side is to delever as fast as possible. We have shown in the past that we are able to delever around 0.5 turn every year. With the strong growth and profit improvements we expect in 2021, we'll be able to convert that into additional cash as well. So we'll be close to nearing 3x leverage by the end of the year.

And on the capital allocation rules, nothing has changed. Real focus is on supporting the organic business, delever and in midterm, having some small bolt-on acquisitions as we have communicated. I think that's the capital allocation rules we have set ourselves, and they very much remain intact as well.

There are no further questions at this time. I will now turn the call back to Mr. Geoff Wild for any closing remarks.

Well, thank you, operator, and I'd like to thank everybody for the questions today. We've got to close the call here as we're running out of time.

But to finish, I'd reiterate a few key points from this call. Our Electronics business has grown throughout 2020 and is poised to continue growing as secular trends like 5G infrastructure, 5G smartphone replacement cycles and growth in IC substrates and semicon packaging accelerate. Our leading technology and comprehensive solutions are key enablers in the electronics value chain.

Further, as GMF markets are quickly improving and our focus on delivering sustainability-enabling solutions will offer us a multiyear tailwind. Together, these secular trends not only provided a constructive backdrop in the fourth quarter, they also present a multiyear opportunity to grow our business, expand share and deliver strong returns to our shareholders.

And finally, may I say -- to our teams around the world, I'd like to say thank you for continuing to stay safe and sustain focus on our customers. Your dedication and flexibility have enabled us to manage successfully through the pandemic, become a public company and have positioned us very well for the future. I expect our hard work to pay strong dividends as we move forward. So thank you all for being on the call today, and we look forward to speaking with you again at our next call.

Operator, that ends the session. Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now all disconnect.