Hello. Good afternoon, everyone, thank you for joining us today for Yageo's third quarter result webcast. Yageo is the world's largest supplier of chip resistor and tantalum capacitors, as well as a top three supplier for MLCCs and inductors. My name is Howard Kao, and I'm the Coverage Analyst here at Morgan Stanley. We are very honored again to have Mr. David Wang, CEO, Mr. Eddie Chen, CFO, and Mr. Claudio Lollini, Head of Global Sales and Marketing of Yageo here with us today.
We look forward to their insights and comments on the company as well as the market. The management team will first walk us through third quarter results and also provide some forward-looking commentary. After that, we will open it up to questions. At any time during the webcast, you can send in your questions in a text box on your screen. I would now like to turn it over to Yageo's Eddie and David for opening remarks.
Good afternoon, investors. Thank you for joining our third quarter earnings conference. As usual, I'll kick off with a quick update on the third quarter financials, followed by David and the questions. Please. First, let's look at the third quarter financials. Basically, the third quarter has been a pretty stable quarter compared to the previous one. You can see it from the selected items here. We have a pretty flat sales in third quarter, coming in at TWD 31.7 billion. About 1% growth from the previous quarter. Gross margin pretty stable as well, at 35.2% versus 35.1% in the previous, or TWD 11.1 billion.
We're seeing very stable or in a very controlled fashion on the OpEx spending, so you're seeing the OpEx dollar in third quarter come in at about TWD 4.5 billion, roughly on the same level as the previous one. The operating profits at TWD 6.6 billion, 20.9%, slightly up from the previous quarter. On the non-GAAP front, we're generating about TWD 556 million in third quarter, largely due to the weakness in U.S. dollar. We're seeing that level of non-GAAP benefits slightly off than the previous quarter, but still maintained at 1.8% of sales.
Income before tax comes in at TWD 7.2 billion or 22.7%. Slightly less than the previous quarter because of a lower non-operating performance. The income tax in the third quarter comes in at about TWD 1.5 billion versus TWD 1.9 billion the previous quarter, largely because we don't really have the retained earnings tax impact in this third quarter. The net income for third quarter comes in at TWD 5.7 billion or close to 18%, slightly better than the previous one. Looking at the EPS in third quarter is at TWD 11.01 per share.
This is after the expanded capital base due to the stock dividend distribution, as well as some of the ECB conversion. We're talking about TWD 5 billion capital base in third quarter. That EPS of TWD 11, slightly better than the previous one at TWD 10.85. EBITDA, TWD 8.8 billion or TWD 8.9 billion, were close to 28%, also slightly better than the previous quarter as well. If we compare that to third quarter last year, you can see that the revenue is up almost 16%. This is largely because of the acquisition of the Telemecanique Sensors business that we completed October last year, so it was not included in the third quarter of last year's results.
You can see the gross margin percentage expanded a little bit as well due to the accretion of the acquisition, 33.2% gross margin percentage last year. The OpEx was at 13.6% against 14.3% this quarter because the consolidation or the integration is still going on. We're seeing quarter-over-quarter improvements on the OpEx front. We continue to have the OpEx in a very controlled manner. Going down to the EBITDA margin percentage last year, 27.3% versus 27.9% this quarter, again, accretion on the margin performance there as well. Next page. Let's take a look at the year-to-date financials, and compare that with last year.
You can see the year-to-date, we generated TWD 91.7 billion, or a 14.2% increase over same period last year. Gross margin also improved from 33.1%- 34.7% year-to-date. OpEx, 14% versus 15% this year. Again, I think we're continuing to doing our best efforts to integrate the acquired business there. The operating margin, as well as the EBITDA margin, are all showing some increments. This year versus same period last year. Next. Let me walk you through some of the sales breakdown by different aspects for the third quarter.
You can see the quarter-over-quarter, I think the change is relatively marginal. Basically, just ±1% across the board. MLCC, this is your magnetic sensor. You are seeing very marginal shift from quarter-to-quarter in terms of products. Looking at the region, it is in a pretty similar fashion as well. You can see Europe is showing slight weakness there, so marginally down by 1%, that's met by the resilience in the rest of the Asia by about 1% as well. The mix by region hasn't really shifted that much. Next slide.
By channel, you can see that there's a swap between the EMS and direct sales by about 3%. All in all, the global distributors are still our main channel of recording our sales at about 40% there. Segment-wise, again, we're seeing more weakness in industrial sector in general. That was compensated by the resilience that we're seeing in computers, computing, and the enterprise systems there. PC, smartphone are all showing some signs of improvements there. Next. Here is an overview on the balance sheet.
As of the end of the third quarter, you can see the cash balance for the company is at about TWD 94 billion, slightly up from the previous quarter. Basically, the balance sheet is fairly flat quarter-over-quarter at about TWD 358 billion. Inventory in good control as well. You can see that balance, TWD 26.8 billion versus the previous quarter, only showed about 1.3% increments there. On the liability front, we were able to continue to deleverage a little bit with the total liability comes in at about TWD 203 billion, and the net borrowing or the net financial debt for the company also came off a little bit, slightly less than TWD 23 billion, versus TWD 24.5 billion in the previous quarter.
If you look at the ratio of the net financial debt over equity at 14.7%, it's down by about 2.1 percentage points than the previous quarter. We're not really back to the below 10% net debt to equity period level prior to the acquisitions last year. I think we're on the right track in terms of continuing to see the strength in the balance sheet. The similar fashion in the net financial debt over EBITDA as well. You can see the multiple is at 0.7x versus 0.8x in the previous quarter. The ROE is pretty stable. We're looking at annualized 14.5% as of the end of the third quarter. That compares to 13.1% same period last year. It is a mild increment there. Next. I'll leave David to comment on the outlook for the fourth quarter.
Thank you, Eddie.
Sure.
As reported by Eddie, we just saw the quarter three result in terms of revenue, gross margin, and the operation income percentage, and they were pretty much all as guided. I have no further comment here. If we see the quarter four, first let's take a look at the revenue, and we have a couple of highlights here. From the market, we still see that computing, communication are still in a good shape. We also see in the market the pricing is pretty much stable. Internally, when we see the book-to-bill ratio, the last three months average is also close to 1x.
Usually in the quarter four, traditionally this is a low season. This is why we give the guidance that next quarter the revenue will be a single-digit percentage decline quarter-on-quarter. In terms of gross margin percentage and the operating income percentage, we guide the low single-digit percentage decline quarter-on-quarter. This is mainly because of the lower revenue that we just guided in Q4. Internally, we will try to maintain the utilization, and this is mainly prepared for the Chinese New Year inventory preparation. We also have a number of costs and OpEx control progress, and this is why that we give the low single-digit percentage decline quarter-on-quarter in gross margin and the operating income percentage. Thank you, Howard.
Thank you, Eddie and David. We will move into the Q&A session. Again as a reminder, please send in your questions in the text box on your screen, and we will get to them shortly. Before we get to the questions online, while we wait for more questions to come in, maybe I can ask the first question. Maybe this is for Eddie.
Can you just talk a little bit about your third quarter again? I think when you guys were guiding for Q3, you guys were guiding for margins to be up low single-digit percentage quarter-on-quarter. Seems like both gross margin and OP margin ended up being a little bit more flattish. Has there been any change, maybe versus three months ago, that caused margins to come in a little bit more flattish than low single-digit percentage QoQ? Thank you.
Yeah. If I may, I think you can pretty much tell from the sales mix that we just demonstrated in the quarter, some decline in the industrial sector. Some of those declines are probably in better margin area. I think it's really the product mix shift quarter-from-quarter. That's probably the main reason.
Got it. Speaking of product mix, there's a question here online as well. I remember three months ago, you guys mentioned industrial and automotive will continue to be weak until year-end, maybe we'll see automotive recover first before industrials will recover. I guess it seems like both of these segments, especially industrials, have gotten a little bit worse. Can you talk about the recovery in terms of timing for both of these two end segments and when can we expect things to stabilize and maybe start to see some recovery? Thank you.
I can touch base a little bit and maybe let Claudio comment more on the marketplace. In terms of quarter-over-quarter shipment, I think we're seeing the auto actually increase on our part by about 1%. Just mild growth there. I think the weakness in the industrial exposure is probably weaker than we had expected, which is why you're seeing that the guidance will not really live up to the guidance that we had in the previous quarter. I think the direction in general, is pretty much on par as we expected in the last session. I think methods use probably vary a little bit from sector to sector. Maybe let Claudio comment on that.
Yes, Howard. Automotive, there is also a regional mix that plays an important role. What we observe is areas of weaknesses for the automotive industry, in particular the EV part for the Western brands. Actually, quite the opposite is true in Asia. In China, the EV market is still quite dynamic, at least for us. We still record growth when it comes to EV presence in China for our product quarter-over-quarter and year-over-year. We do have a good engagement and good penetration in both markets.
When you combine both together, as Eddie said, the net result has been flattish, slightly up. Moving forward, we don't expect next year to be a particularly exciting year, at least for the traditional internal combustion engine number of units. For EV, I think there will be growth, but maybe a little bit more slow than previously anticipated. Moving to industrial. It's true. Industrial is the segment that I think is the most challenging now. It's mostly in Europe.
There is a little bit of North America and a little bit of Asia and Great China, but Europe is definitely the area where most of the industrial customers are, and they continue to have themselves lower booking, bit of inventory. There has not been a whole lot of CapEx investment yet. You read the news of the German economy, in particular in Europe, is not particularly positive. We expect another six months at least before we can see a significant recovery. We are budgeting the first half of next year for our industrial segment also cautiously.
Got it. Thank you. In terms of outlook for Q4, there's a question here asking about the outlook by different end product segments. For example, MLCC resistors, tantalum capacitor. Well, I guess by technology, I should say. Any color here?
I can give some color. In general, as Eddie and David already mentioned, Q4 is a seasonal softer quarter than Q3 for us. Asia is a big driver for that. There is a lot of build in Q3 in preparation for the end of the year. There are inventory correction dynamics. Europe and North America have long holidays in Q4. There is some holiday in Asia in Q4 as well in the month of October.
All of that said, within the product mix, there are pockets of growth mostly for products that is involved in the AI server production. We had an AI summit a few weeks ago here in Taipei. We showcased our technology in our inductor space with our NANOMET technology. That product continues to have positive development. In general, all the products are looking for a softer Q4 compared to Q3, and segments as well.
Got it. Thank you.
Thank you.
Is there any preliminary comments that you can provide in terms of 2025, either first quarter or the full year, now that we're getting closer to next year?
Well, very high level, I got to say, because we're in the middle of preparing the budget for next year, like Claudio just said. Briefly, we're cautiously optimistic. Some sectors have been experiencing certain weakness throughout several quarters. We're seeing some support there. If you take away the seasonality, I think from 2025, we're still optimistic about the potential growth.
Again, I think the market is such that we're not being hopeful that we will be bouncing back a lot from what we have been experiencing the past several years. We're cautiously, but then we are seeing signs of recovery in different elements or sectors. From that part, I think we're still relying on a certain growth in 2025.
I see. If we can just drill down a little bit into specifics on the consumer electronic space. Going to next year, do you have any relative bullishness or cautiousness if you compare the PC market versus the smartphone market? Is there any particular end segment where you are looking more optimistic going into 2025 versus the other?
Definitely the computing and enterprise segment is the one that we believe will have the highest growth rate compared to the other segments. We do have a positive expectation out of our defense, aerospace, medical, although it's a small base, it's about 5% of our business, but we think will develop nicely as well. Automotive will continue to be a mix. It will be important to see if there is somewhat a recovery from the Western branded car makers in both EV and traditional. Industrial, I think, will be an area where we are mostly cautious at this moment. We have telecom, which in part also benefits from the AI introduction.
That will be positive, maybe not as much as the computing and enterprise. Consumer we think will be positive, driven by higher discretionary spending. Mobile phones are hopefully going to do a little bit better. There is introduction of new PCs, AI PCs, all of this hopefully will have to generate some revenue there. The most bullish one, definitely computing and enterprise.
Got it. Thank you. Maybe just a question on Q1, specifically. I guess Q4 now we're seeing top line momentum to be down seasonally, which is in line with historical Q4. Looking to Q1, are you expecting first quarter to be similar with historical seasonality as well? We're expecting Q1 to be up on a sequential basis? Is that a fair kind of a statement?
I'll be cautious to give first quarter guidance at this junction. I think we think it'll more or less follow the seasonality pattern. Fourth quarter, I think you're seeing the guidance here. We're hoping there will be some balancing act in that first quarter 2025.
Got it. Thank you. In terms of utilization rate, can you please remind us what is your utilization rate in Q3 for both standard and premium, and what is the expectation for Q4? Thank you.
In Q3, the utilization for standard was around 65%, and premium product, 75%. Basically, although we expect a lower revenue in Q4, we will try to maintain the similar utilization in Q4. This is mainly because we want to prepare for the Chinese New Year, because Chinese New Year in January, it will be a very low month, so we need to prepare some inventory there. The target is try to maintain the same utilization in Q4.
Got it. Thank you. In terms of your inventory turnover days, I don't know if I missed this in your prepared remarks, but can you remind us what is your inventory turnover days for Q3?
Yeah. We're sitting at around 120 days. Slightly better than the previous quarter.
Got it. Thank you. In terms of 120 days, is this a comfortable number for you guys?
Yeah. This is probably by far the lowest point in a year. I think we do have a certain level of confidence in that inventory control. Given the fact that fourth quarter is going to be slightly slower, that we're maintaining the utilization rate. Maybe we're seeing a certain uptick of the inventory, but it's nothing to shift majorly the turnover days. I think the content of the inventory or the different components of the inventory could be managed to weather through the inventory level. Yeah, I think we're pretty comfortable with that level.
Got it. Thank you. There's a question here that's a little bit more specific, in terms of your revenue breakdown in the third quarter by geography, Asia revenues were up 1% sequentially. Is there any color on what specific country that this revenue was mainly coming from? Was it Taiwan, Japan?
Yeah. Rest of Asia, there's been a lot of movement of manufacturing footprint from Greater China or mostly China out to Thailand, Vietnam, Southeast Asia in general. There's a lot of EMS in particular that are doing the exact same program as before, now they are shifting some of that assembly out of China. There is a little bit of that. That is particularly true in the computing and enterprise segment, where some of the largest programs that we participate in happen to be built there, and we ride that growth in Southeast Asia as opposed to China.
Got it. Thank you. Just to follow up on this slightly more positive outlook for computing and enterprise segment, will that only be for MLCC capacitor and resistor, will we see benefits on your tantalum business as well? If I remember correctly, tantalum is, for you guys, it's used quite a bit in PCs and maybe even networking segments.
Yeah, indeed. Most of our tantalum product is in computing and enterprise. It's no coincidence that all the growth that we experience, or most of the growth I should say, that we experience in tantalum this year, has been directly linked to computing and enterprise. Our polymer is utilized in laptop notebooks, server, AI servers. There is a lot of benefits as those program ramp up and continue to grow. Our inductor product, from our Tokin brand, is largely used in some AI server program. Of course, MLCC resistors and capacitor in general. A lot of products that are benefiting from this.
Got it. In terms of your tantalum business, is there any comment on where utilization rate is right now? I remember you guys have expanded quite a lot of capacity in the past maybe two years, for your tantalum business.
Yeah. We have three main sites, which is quite exciting actually because we have capability to produce at large volumes in China, in Thailand, and in Mexico. That gives us a lot of options, a lot of proximity to customers. Utilization rate has been running now between 70%-75% for the polymer line. We are in a good place. We like to have that buffer and we are ready for some up-siding should upside come. Pretty content with that.
Got it. Thank you for mentioning the multiple production facilities that you guys have. Recently, there's been a lot of concerns on potential tariffs and how that would impact, I guess, different businesses. How do you guys view this going forward, and do you guys think this will have an impact on your business if there is any potential tariffs that are implemented post the U.S. election?
Basically, I think for all the product line we have there, we maintain multiple production lines over the world. Like for the product we just mentioned, like tantalum, we have multiple factories in China or in Thailand or in Mexico. If you see MLCC, we have the similar scenes. We have the production in Mexico. We also have the production in Taiwan and China. Across all the product line, we have multiple factories there. I think when we communicate with customer, most of them, or almost all of them are very satisfied with this setup. I think we can manage the situation quite well today.
Got it. Just to follow up on that, do you think customers are more willing or are more keen to do business with you because you guys have multiple production sites globally versus maybe some of your peers who isn't as well diversified in terms of their production footprint geographically?
Yeah. We think so, and we hope so. I hope so.
Got it. Okay. Thank you. Maybe Eddie, one question for you on FX. Can you remind us, because right now there's been a lot of volatility, but any color on FX sensitivity between the U.S. dollar and Taiwan dollar on margins?
Yeah. You could see that effect in this quarter in particular. Honestly, what we have been doing in the past quarter or so is trying to capitalize on the prior position that we had in the early first two quarters of the year. We actually realized some of the positions benefits, but there continues to build up the exposures throughout the quarter. It's kind of wish-wash.
Net-net, we're able to balancing that dollar weakness during that particular quarter. I think year-to-date performance, I'm still pretty proud of that achievement by the team to weather through the volatility of the dollar, throughout the year. I think we're pretty lenient right now in terms of the exposure, particularly with regards to dollar and TWD. I think we're managing quite well. We're okay if the dollar continues to weaken from here. I don't think we would get too much hit from that trend.
Got it. Just staying on margins, any impact because of higher utility cost that we're seeing maybe in Q3 or expected in Q4?
If you're referring to the electricity cost in Taiwan, yes. There will be some effects on some of our operations here in Taiwan. I think we've taken some internal review on that, and the impact is still marginal given the scale and the operational environments right now. I think the team is working on to try to withstand that increments of utility cost. I think it's still manageable right now.
Okay. Got it. Thank you. In terms of revenue mix for servers specifically, is there any update on what that is as a percentage of revenues at end of Q3? I remember, I think maybe second quarter or first half, server revenues were around 6% of total revenue. I was just wondering if that has changed for the third quarter.
I think. I have to say that it's kind of high level, given the fact that we probably have no control whatsoever with regards to the product that gets applied in different devices or systems. Our best guess is we're still around that level, probably slightly higher than that, given the momentum we're seeing from the customer activities. Probably that high single-digit percentage is still pretty much what we're exposed to right now.
Okay. Got it. Thank you. In terms of the China market, have you guys seen any significant pickup in terms of white good demand recently, like household electronics?
Thanks for the question. Actually, our China market, as you know, we have an extensive local distribution network in China. It's one of our biggest strength. We command more than 60, 65 local distributors that can really help us to reach and penetrate a lot of customers in a lot of geographies and provinces in China.
Last year was a challenging year. This year, our China business is up year-over-year, double digit, and it's been up since January, and it kept that momentum up until now. It's slowing down only slightly, really. For us, that geography, which is in that distribution business, there is a lot of consumers of white goods are in there. It's been pretty good so far this year.
Okay. Got it. Thank you. Maybe can we just come back to inventory? I remember three months ago on your second quarter earnings call, you mentioned your global distributor inventory is in seven to eight months, a little bit higher than the average of 46% . Is there any update here on where global distributor inventory is and maybe some color on greater China distributor inventory as well?
Yeah, I can cover that. The global distribution inventory, we separate into two portions. One is the high service channel, which tends to run with a much larger inventory, and that has been stable. The other portion is the volume large global distributors. That inventory came down steadily over the last year. Now, it's still sitting probably a little bit higher for our liking, maybe a month too much. It's about five months on hand, based on their last three-month average POS, 5.5% We think the right number there should be more like between 4%-5% .
It's not too far, and if POS were to pick up just slightly, then you're there in terms of month on hand. When it comes to China distribution, actually, they built a little bit of inventory. They were down to less than three months on hand a few months ago, and that was way too low. As I said, that business in China has been growing double digits, now they built a little bit of inventory and they are sitting on about three and a half months on hand. Up about a month, versus couple of quarters ago.
Got it. Thank you. With that inventory up to three to three and a half months in China, I guess that's not something that you guys are too worried about given the strength of your China business that you've seen in the past couple of quarters?
No, not at all. It's very dynamic, and we respond very quickly there in either direction. Not a concern at all.
Got it. Thank you. In terms of your product portfolio, this is a question here on where you see higher growth, especially now that we have a larger inductor business post the consolidation of Chilisin. I guess in terms of just overall portfolio, again, by end segment, where do you see growth to be higher from here, maybe in the next one, two years?
Going back to the principle of having a computing and enterprise segment that is going to lead the way, then you cascade down the main product in that segment, are a combination of tantalum, polymer capacitor, and inductors. Yes, there will be growth in inductors as well. Then other capacitor and resistor, mostly MLCC, dielectric, and our chip and resistors.
When it comes to product like our film and aluminum electrolytic capacitor, as an example, or a portion of our portfolio in ceramic, in particular, the KEMET brand. Those products are also used in industrial and automotive, as well as some of the legacy Pulse portfolio. For those products, then growth will be delayed a little bit depending on the end market.
Got it. I guess, I've been asking every single quarter, so I'm going to stick to the tradition. AI revenue mix. I know you guys don't really talk about this, but I think Pierre mentioned to maybe some reporter post your AI Summit that revenue is around 5%. I won't specifically ask on this, but just wondering, within your product portfolio, capacitors, MLCC, tantalum, resistor, inductor, which segment is bigger, geared towards AI? Maybe or just by ranking, any color you could provide here.
Yeah. Computing and enterprise has the biggest exposure towards AI. After that, we put laptop and notebook within computing and enterprise. You also have AI notebook will be in there. After that, I would say the two segments where you will see AI presence the most after computing and enterprise will be telecom and then consumer products. Not necessarily this translate into the same growth of componentry that you might have in computing and enterprise, but you will have it there.
Eventually you will have AI also in industrial and automotive, of course. Actually, automotive is the second segment where I think the AI play is the biggest, right? Because of the autonomous vehicle and all the assistant driving elements that you have in a car these days. It's really permeating across all segments. If you were to rank, I would put computing and automotive first, telecom and consumer second, and then industrial being perhaps the last one to benefit from AI.
Got it. Thank you. Very helpful. In terms of what about by product technology, like capacitor versus resistor versus inductor, any comment on which one is bigger geared towards AI? Would inductor be more geared towards?
They're all used in a lot of segments. I'm sure you've seen the news, if you just zoom in into the growth of the AI server, the growth in the BOM around MLCC is significant. High capacitance componentry is in particular the one with the biggest growth. For us, the way we look at it, capacitors, tantalum polymer, because we have that in our portfolio.
High capacitance MLCC, and resistors and inductors will all benefit first. Behind that, there will be film, aluminum electrolytic, other type of magnetic componentry, maybe larger, mostly for industrial and automotive. MLCC, in general, is used in any application, so that will benefit every time there is increase of electronic content, you will see that benefit.
Got it. Thank you. Lastly, maybe just a quick follow-up and update on your progress regarding active components. Now that we've talked about passive components for the majority of this call. Any updates on active components, either in terms of synergies or any updated progress that you guys have for the next couple of quarters?
We continue to explore opportunities. In particular, we have been, as you know, co-working with APAC and uPI. We have been selectively approaching our distribution channel for some stocking packages of selected product. For example, we've been looking at MOSFETs product offering in various voltages, and we've been doing some crossing. Far, a lot of preliminary activity and market study. It's mostly a plan for the following years, not something that we look for growth in this particular calendar year yet.
Got it. I think we are finished with the questions that we have online. Maybe I will hand it over back to Eddie or David to see if you guys have any closing remarks.
Yes. Thank you, Howard. Basically, we think Q4 is our low season, so that's why we give this guidance. Actually, there's nothing to worry. For the growth trend, like computing or telecom segment, I think we are following this trend very well. Maybe we need to be a little bit more patient in the industrial. As Claudio said that it might take another three to six months to come back. I think for the current situation, we still can maintain and deliver a relatively good, stable performance. Product and capacity-wise, we are ready when the market bounce back. Thank you, Howard.
Great. Thank you, David, for your closing remarks. This concludes our webcast today. Thank you, everyone, for joining us, and thank you again, David, Eddie, and Claudio for your time and sharing your thoughts with us. We will see you all next time.
Thank you.