Earnings Call: H2 2018

Mar 22, 2019

Ladies and gentlemen, thank you for standing by and welcome to the AAC Technologies 2018 Annual Results Investors Webcast and Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I will now hand over to your host today. Please go ahead. Good afternoon, everyone. Thank you for joining AAC Technologies 2018 annual results conference call. I'm Eddie Gong, Head of Investor Relations. And joining me on the call today are Mr. Benjamin Pan, our CEO and Mr. Richard Mok, our Managing Director. Before we begin, we would like to draw your attention to the disclaimer. Some information we discuss today may contain forward looking statements. This information includes revenue, gross margin, future products and capital expenditure. Actual results or trends are very different from what you hear today. We will now briefly review any results and take questions afterwards. I will now turn the call over to Richard Shen. Hello. Good evening, everyone. Thanks for joining the call today. I'm not going to pick up our precious time too much, but let me quickly go through, I think, what most of us have read through and saw in our results announcement today. In 2018, AAC Technologies achieved significant transformation. We are here to the objective of leading innovation and enhancing music experience. We had achieved much progress in innovation and established new versatile platforms. Despite the decline in global smartphone shipments leading to deterioration in the technological innovation in 2018. During the year of 2018, the company's revenue reached rmb1818 billion, a drop of 14.1% on a year on year basis. Net profit, rmb3.8 billion, decreasing 28.7 percent on a year on year basis. Gross profit margin at 37.2%, a decline of 4.1 percentage points. We declared a final dividend of Hong Kong dollar 1.03 per share, which means we maintained a full year dividend payout ratio of 40%. In this slide, in Acoustics, we achieved major breakthroughs and launched innovative new acoustic platform. Most of you had heard already, super linear structure, the SLS, in 2018. It successfully penetrated most mainstream Android flagship models, and it came with significant enhancement of unit price. However, since the overall shipment of SLF is still declining and there was surprising pressure of legacy products, Revenue of this segment has declined 9.4% on a year over year basis to RMB8.7 billion. Our gross margin for this segment dropped 3.6 percentage points to 37.2%. In 2018 I will tell you in 2019 this year, we will continue to accelerate upgrade of the SLS technology platform, and we will significantly enhance its penetration. We target to penetrate into all mainstream flagship models and also midrange models during the year. We believe the continuous operating capability of this platform will enlarge our market share in acoustic and drive revenue growth and also improve gross margin. At the same time, this platform will enable us to explore new markets such as the VRAR devices and smart cards, which I think all of us believe strongly believe will deliver exciting business opportunities. The Office Business segment contributed a satisfactory revenue of RMB55550 1,000,000 in the year 2018, a year on year increase of 2 40%, mainly we successfully penetrated into major smartphone customers. This revenue accounted for 3% of the company's total revenue in 2018. Monthly shipment of plastic lens already reached 20,000,000 at the end of 2018. We believe there's room for further improvement in our operational efficiency and gross margins where economies of scale will continue to contribute. During 2018, the company continued to increase R and D resources. As announced, this includes the expansion of the optical R and D team in Finland. This year, in 2019, I think we all see triple cameras getting more and more popular. I think the demand for upgraded optical specs, we all agree, is increasing. We expect the enterprise of lenses will be driven up as demand should remain strong. We will increase monthly production capacity for plastic lens to over RMB 50,000,000. Needless to say, we will continue to promote WLG hybrid lenses for high end applications to create the revolutionary user experience that all our smartphone customers and the industry are looking forward to. For the Electromagnetic Trial and Precision Mechanical segment, the confidence in haptic demonstrated kind of slowdown in terms of innovation. Average unit price and shipments of the haptics dropped in the year 2018 and competition declined apart. That has led to a decline in the revenue. Also, there was weaknesses in the high end models in the year 2018. The utilization and gross profit margin was impacted as Precision Mechanical Shipment was below our expectation. Revenue of the combined segment of the Electromagnetic Drives and Precision Mechanical stood at RMB 7,900,000, a decline of 23.8% on a year on year basis. Gross profit margin dropped 2.8 percentage points to 41.1%. This combined segment accounted for 43.5 percent of the company's total revenue. Looking ahead, we expect volume of plastic components and solutions to increase And for example, under screen fingerprint technology with unibody large curved 3 d glass cutback cover design. We'll continue to drive the upgrade of tactics and also more customized smartphones for video games. Our newly launched set up model motor module solutions for hot off cameras to achieve full screen smartphone design is likely to create a high development potential for this segment. As for Precision Mechanical, we target to optimize existing production capacity in the year 2019 this year to significantly increase revenue contribution. Moreover, we believe the gas casings in the 5 gs era will continue to give us opportunity to develop new integrated solutions incorporating ultranarrow metal planes, larger 3 d glass and also the laser plastics for the high end models. Going forward, we will continue to lead to the logical innovation to create value for customers and further enhance user experience. We will adopt a 2 pronged approach. R and D and Manufacturing continue to develop core technologies to strengthen our Versum Power technology and manufacturing platform. This will give us the unique competitive advantages and our collaboration with strategic customers to deliver innovative user experience. We will also rationalize our global resources to maximize efficiency. We believe the reliable 5 gs era will drive specification upgrades in smartphones. We also believe innovative smart devices launched recently, such as these foldable and telescopic smartphones, will allow us to realize our leading technological advantages. We are actively preparing to leverage our capability and synergies to tap on new markets. Thank you all again for supporting us. I think that brings us to the end of my short slide image for discussion to start. Thank you. We will now begin the question and answer session. Our first question comes from the line of Kina Wang, Credit Suisse. Please ask your question. Thank you for taking my questions. I would like to ask about the guidance in the first half twenty nineteen. For your Q1 twenty nineteen because you have provide a guidance firstly from profit warming, but I wanted to check if it's actually caused from like demand issue or margin pressure or ASP pressure or there will be some one off impact in the Q1 to drive the over 65% year over year decline for the profit? That's the first question. The second question was about the seasonality in the Q2 or the outlook. I know it's a bit early, but I think so far, because the smartphone market, we see in the press release that you mentioned some of momentum picking up. So I wanted to check if there's any seasonality you see in the second going to 2nd quarter will affect the business as well. And may I also ask another third question about Two questions. Two questions. Sorry. Okay, fine. Yes. Okay. Let's talk about the Q1, what you described as guidance. We pointed out that I think we've seen a potential decline of 65%, a range of 65%, 75% in our net profit on a year on year basis. I think that came about, as we have said in the announcement, that the industry has a weak Q1 as expected. But that's not the major kind of factor that we need to draw investors' attention. I think the 2018 slowed down in what we call a prolonged replacement cycle, but also the fact that the momentum of the slow momentum in 2018 has not yet kind of recovered, especially I think for the month of February, February being the Chinese New Year and the 1st day season, I think particularly hit the industry shipments of smartphones. You asked about whether this is a one off. I think it's very much a one off because AAC's position is to deliver exciting innovative solutions and products to not only getting good recognition in increase in ASP, but also deliver exciting new role maps for technological innovation. I think Q1 is very it's not an ideal quarter for companies to take advantage of the industry situation. I think furthermore you asked about gross margins. We no longer I'm afraid we no longer kind of gave precise guidance on gross margins. But I think we have to recognize that our margins will reflect our product mix and also in terms of our efficiency or economy of scale. I think the Q1, those potential of displaying our strength do not really give us the best scenario of creating a very good kind of performance for this Q1. And we very much believe it's just a one off because I think the smartphone innovation will continue as you kind of suggested also in your question that we are already seeing new designs of different smartphones. So the second question you talked about you asked is about Q2. I think Q2 April to June this month, there are some industry lines up of new models. But I think have we seen the peak of customers launching new exciting models? I don't think second quarter has not been and it doesn't look like the Q2 going to be the best kind of new launch site quarter either. So I would rather kind of say, instead of giving guidance, I would say, Q2, we are seeing opportunities in all the segments that we are in, in acoustic, in haptics and also in what we call the electromagnetic drives coming to our shipment opportunities project we are going to deliver. So I think Q2 will be interesting, will be a good foundation for us to move into the second half of the year. Let me repeat that for the English listening investors. Benjamin wants to emphasize that the outlook for Android segment is a completely different story to 2018. The opportunities that stands in front of me are very clear and very and it's happening. For example, let's go through the different 4 major production lines. As we know, the acoustic, the SLS platform, we introduced this new platform in the second half of twenty seventeen. And mass production gradually becoming fully unfolded in the year 2018. And I think this year, we will see increasing penetration of each of the Android customers taking place throughout the whole of this year. And with that, that reflects the technological advancement we have achieved in this SLS platform. And we expect on a quarterly on quarter basis, the business that SLS contribute should reflect the increasing penetration of the Android customers' adoption of this platform. In optics, we've seen good sizable contribution to our revenue in the year 2018, but we are preparing for more exciting things to come. In the year 2019, we are already planning, as we have announced, for a RMB50 1,000,000 capacity, up from RMB40 1,000,000. Although at the moment, we are saying we are shipping something like 20,000,000 per month, but with increasing utilization and improvement in our production efficiency, we are confident that our gradually fully utilizing the capacity will enable us to see very strong interesting growth in the optics business as well. For the 3rd sector product lines, the mechanical RF, I think we are again very confident this is the 1st year that we are we have strong business plans to deliver optimized utilization. We already are in the process of delivering some high end projects of our customer starting in 2Q. And for the nature of mechanical business, the jump from 1st Q to 2Q when we launched this business is going to be quite a marked jump from 1st Q to 2Q. And looking at the nature of the different projects unfolding throughout the year, we believe 3Q, the year on year growth and the 4Q year on year growth, the opportunity is there, but it's unlikely to be a bigger kind of the marked jump where you will be able to see from 2Q from 1Q to 2Q. Last but not the least, we talked about electromagnetics drives. We already in this Q1, we have already entered the phase of what we call pre product production. I think we are well prepared to start mass production and shipment in Q2. And I think the trend of our customers given us strong confidence that this business is continue to see growth in the 3rd and the 4th quarter as well. Thank you. Thank you. Our next question comes from Xiaomushen of Leping Huang, CICC. Please ask your question. Okay. Thank you for taking my question. So my first question is about the camera other optical business. So So I asked in English. So my question is how you we see the camera module company in China has most of them already have their lens business. So how you differentiate yourself, especially we see the volume ramp up very quickly this year? And do you think you plan to enter the module business and to have a full supply chain? Let me capture the essence of what Ben has confirmed. I think in answering the questions about whether AAC will consider camera module business, I think let's go back to our analysis of how we see ourselves as a competitive or leading in terms of Octave platform and technology. I think it's a trend that everybody would agree that interesting development for both the front and rear camera of more cameras to go into smartphone devices. But I think at the end of the imaging kind of design, it really looks at specific user experience in terms of how many number of cameras should be in the front or 100,000,000 will be at the back. But one thing is for sure, the next 2, 3 years is a golden what we call time opportunity for supply for AAC to fully capture not only on capacity, but to demonstrate in terms of us in terms of efficiency in utilizing our production capability and showing the efficiency we can achieve to customer. I think within these 2, 3 years, if we could lock ourselves in with the industry proving to customers that we have strong capability, it becomes a very strong foundation to build further success. We see and we see at this moment, we are well prepared for this opportunity. And as you know, we believe hybrid LAN is a very interesting potential kind of enhancement of what the industry is looking for in terms of optics experience. And WLG, we believe, is a vital, a key part to hybrid lens. We are pleased to tell report back that our plan to build up our capacity in July, we will be able to deliver the, what we call, capacity in mine. The plan for the Europe tooling facility is going on well. We believe by July time, we would have full time something like a team of 50 to 70 operators fully in training or some of them will be fully trained to handle the capacity that we believe to deliver the hybrid lens capability of 6P or 7P and that creates a fundamental competitive foundation that I think is unique and differentiate AAC from other kind of optic players. About the view whether AAC will go into module business, We believe at the end of the day to some extent, the end customers have a final decision making in terms of deciding which lenses or which supplies lenses to use in the camera system. The timing that decision will come from a validation of the suppliers' kind of capacity, efficiency, time to deliver and their trial record as well. And on those parameters, we don't think AAT has any problems, and we are already proving ourselves in those aspects. And at the end of the day, the other key determination for customers to make decisions to go for AAC solution It's our roadmap in delivering high specs and proof that we have understanding and capability in such technology. For example, in the periscopic design cameras that we are seeing the market interest in. So the answer at this moment to the question is, I think we will be considering and we will go into the module business because we see that the lens business, not the lens and the module business, not as a separate kind of island on its own, but really in an important mode that we built to connect to customer as well as to build up our defense business to prove our capability in the OpEx business. As we talked about last year, we already assembled and built a team of sizable experienced image treatment engineers that have experience in dealing with 4x, 5x, Zoom. We will continue to enhance that resources, which we believe will strengthen our optical capability in delivering not only the current kind of design specs that customers, the industries are looking for, but also the next generation. And we believe we have management skills. We believe we have the commitment and we have the optical kind of resources to deliver both capability in not only the plastic lens, WLG and strong understanding of the mobile business as well for our customers to strongly appreciate AAC long term commitment in building up this optics business. So the second question is, I noticed very interesting thing that you changed the name of the segment from RF mechanics to the electromagnetic drive and the precision mechanical. So I would like to understand the reason behind and what's the relation with your haptics upgrades part. Thank you. Ben has commented that as always, the philosophy to make sure that AAT's positioning is not about single product or single project for customers, it's about building up strong sustainable technology platform. I think the kind of better description of business of electromagnetic drive for haptics falls into what we have always been trying to achieve. When we look at the haptics being designed to create a vibration movement of very high spec requirement, we also understood and utilized the same knowledge to design what we call the porous actuators to come up with receivers' acoustic function. At the same time, the further utilization of the knowledge enable us to look at actual kind of mechanical movement in designing the pop up mechanism for these pop up cameras coupled with what we call the decelerated endearing design, we can achieve this new exciting design for innovation for our customers. But all of this comes back to our important recognition of what we call equipment use or general usage applying a strong technology understanding, applying on the basis of a technology platform. And because of this, it has proven that the multi, what we call, direct applications usage of technology platforms can be versatile, can actually add a lot of value to our customers' design. But also in terms of financial returns, we will continue not only improving but sustained utilization of the already invested equipment to enable a long return on our capital being invested. And on those both achievements, it's definitely what differentiates us from the other suppliers of kind of what we call products as such. The top of products we believe this year, initial target is a range of around RMB80 1,000,000 to RMB100 1,000,000. I think we have to wait till the year 2020 next year to see maybe that shipment exceeding 100,000,000. Already, we are starting small projects on the actuators, acoustic components. I think both of these will demonstrate sustainable growth, not only in short term, but in a long time period of time. And that is exactly what AAC has been building up our strategy and our capability for. Thank you. Our next question comes from the line of Ann Lee from Nomura. Please ask your question. Hello, Ben, Rachel. My first question, I want to ask about this year's seasonality. May we know that which quarter could be the sales button for this year? And yes, and also how about the margins changes trend for this year? Because it seems that you are very positive on Android development and also a lot of new products. But however, it seems that the other big customer size dynamic is not that clear. So could you give us some color from a whole company's point of view? I think, Ann, thank you for your question. I think the seasonality, a lot of it is only a short term reflection of kind of different phases that the industry is going through. But more importantly, as we have described it early on in the call, in the different product lines, we are seeing exciting and definite opportunities to see either specs up for higher penetration of our existing solution. There is no reason that through better economy of scale and better spat in pricing of products driven up that the company should not try the best in delivering a better improvement in gross margins. Without saying the 1 quarter, it's in. When looking at, for example, Acoustic, as we said, the SLS will strongly leverage on the already penetrated market share in Android phone and will further enhance that throughout this year from quarter to quarter. And the we just talked about the electromagnetic drive, the components that create new design opportunity for our customers. Those have exciting kind of growth in ASP as well. And reiterate the point about without further incurring further investment on the equipment that we already invested, the return overall to the company would be positive contributory. On those things, I think we have together with our teams in the production and our R and D team, we are easing every quarter's opportunity to demonstrate the better improvement in the tech specs and also products. Ben wants to add the point that from where we stand at the moment, the industry looking and various development phase of our product line, it looks like the first half and the second half, there will be a big difference this year. But all the same, I think this gives the opportunity to for the company to capture and to deliver differentiated kind of solutions to our various customers throughout the different quarters. Ben wants to add also add the fact that when we talk about the strategy that we've been pursuing, we are not changing anything for key components where we can demonstrate our key technology platforms through production efficiency, higher specs, automation, continuous improvement. There is no reason that we should see gross margins not being achieved as we have achieved in the past for these key technology components, I. E. About 40% that we've been targeting. On the module level, whereby when there is consideration for competition or what we call to provide the connection to the customer, that after considering the minimum or the return, the appropriate return for the company without further investment, without further CapEx investment, we believe that again, there's no reason it could not offer a detrimental kind of adverse impact to the return on assets that we are seeking. So on those two pronged approach, we can see we should land ourselves back into the high growth era of delivering very exciting in terms of new key components and also in terms of increasing market share. But at the same time, we are not ignoring our cost control. With increasing revenue, we believe our relatively fixed operating expense such as the admin or the R and D or the selling admin, I think there is still very strong potential and scope for them to go below the ratios that we have seen in the past. So the management will have new kind of impetus to drive revenue, but at the same time, deliver solid, good financial performance. Thank you, Arthur. I have some questions to extend from this question. Because it seems that you provide the Q1 earnings warnings and also saying you just mentioned it could be one off. So but when we talk about visibility for Q2, it seems that you have higher confidence for second half rather than second quarter. But so can we say that no matter second quarter's sales whether it's improved sequentially or not, the margin should be able to come back to a normal level. Is that something we should understand? And if that's the case, can you help us to understand what are the one offs in the Q1? I think when I described the one off is the drag over of the momentum weak momentum from the year 2018. There is no please, economics understand or confused by the word one off. There's no one off incident or event or one off happenings to any customers that led to the general kind of depressed, proper situation that we expect as we announced in the announcement. Going back to the margins, yes, I think we do believe that we have good opportunities to drive backup gross margins with all the product lines and the exciting kind of spec upgrade that we talked about. Okay. And my second question is, could you provide updated CapEx plan for us? See, Ben wants to comment that our CapEx for this year is comparable to the depreciation charge, maybe slightly above the depreciation charge for the year, but not a lot. But most importantly is the allocation, the focus on optics CapEx. Is that optics CapEx including the camera module you just mentioned? So there will be some allocation minus allocation of the Optic CapEx towards the module business that we briefly mentioned just now. Thank you. Sorry, Anne, I think it's time for another question. I'll take this a bit that I think will give the opportunity to some other analysts. We'll see you soon anyway, Anne, I'm sure. Thank you. The next question comes from the line of Alice Chen from UBS. Please ask your question. Hi, Dan, Richard and team. Thank you for taking my question. My first question is still about the gross margin, but maybe back to 4th quarter. So if we compare the year on year basis, I do believe that acoustic company should be year on year decline. But if we compare that others that have been, sorry, the RF mechanical, is there any improvement or is also showing big unmetric cost? Thank you. Thank you for your question on the gross margin. I think we've seen some not some very big changes in the Q4 last year 2018. The major impact, I think, happens, I think, across the board, nothing significantly on 1 or 2 items. But more importantly, I think on the optics that we mentioned of building our capacity to deliver RMB 40,000,000, but the shipment is now standing at RMB 20,000,000. So there is a very interesting, very genuine scope to improve gross margins on the OpEx business even at the Q4 of 2018. And I think in the what we call haptics business, we continue, although we mentioned some kind of new products, electromagnetic drives, the pop up cameras. I don't think they contribute a lot in the Q4 last year. So it will be interesting to see how these new exciting specs of new design of the electromagnetic drives kind of contribute to the gross margins of haptics. But I think lastly, but not the least, I think in the Q4 last year, our MEMS microphone performed quite well. We established good trend in improving gross margins of MEMS microphone, which we expect continue to. So in all, I don't think there's any one product line that accounts for the changes in the 4th quarter gross margins. So if we compare year on year basis, even Haptics products showing our gross margin year on year decline. Is that correct assumption? I would say because we don't single out and split the margins performance on haptics at the moment is being combined into haptics and precision. I can only say haptics is a strong product line that we are capable to show our capability of understanding the automation with regard to electromagnetic design. There's no reason that we should see kind of huge deteriorating or worsening in gross margins of this leading product line that AAC has. Thank you. We have reached the end of our question and answer session. I'll now hand the floor back to today's host for closing comments. Thank you for joining us today. We will speak with you again around mid of May for our Q1 results of 2019. Thank you. Have a good day. Thank you for your participation and this concludes today's conference. You may go ahead and disconnect.