Earnings Call: Q4 2019

Feb 26, 2020

Welcome everyone to Chroma's 2019 4th Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session Please follow the instructions given at that time. If you would like to ask a question. And for your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.chroma.com.tw slash investor slash index onto the Investor Relations section. And now I would like to introduce CFO, Paul In. Mr. In, please begin. Thank you, Jason. Hello, my dear investors. This is Pauline from Chroma. Welcome to the 4th quarter's conference call for the financial release. And, starting from the 4th quarter highlights, if you look at the bar presentation material at page 12, you can see that the there's a bar chart on the right hand side and This is a quarterly highlight for the sales revenue and also the gross margin and plus the costly operating margin. You can see that the 4th quarter and the last quarter, which is the fourth quarter of 2019, jump the highest numbers, which is the sales revenue, which is at the $2,500,000,000. This is a q over q30 1% growth. And a 52% growth on a year over year basis. And the gross margin, although, slightly down to 47%, mainly due to the, product mix sale at the 4th quarter. You can see that the operating margin will still keep it on the high end, which is a 21% Net income reaches to the $600,000,000 in $3,000,000 and this is 26% up on a Q over Q base and the same percentage on a year over year basis. For the fourth quarter of 2019, the major growth is contributed from the 20 solutions. Which is represents, almost 6 time growth on a few over few days. And double the size of the 2018 fourth quarter. So this is a pretty good numbers that we've made. And if you look at the consolidated sales revenue and we reach around Tough, a little bit under the $14,000,000,000 in the year of 2019, which is a 13.9 And this represents a decline of 80% on a year over year basis and mainly due to the dropdown of the and as one of our major, subsidiary, which is a manufacturer and designer for the, automation process and also the product. And that was the, coming from the solar industry, part of the sales revenue. Down at the year 2019. And for the testing equipment, the business, which still represent a growth of 18%, which is on the high end of the single digit. And the consolidated sales of the testing equipment business hit a record high to $11,000,000,000 $11,000,000,000 $11,000,000,000 $11,000,000,000 and this is a pretty good record, which is also the record high. For the parent company's sales revenue in 2019, also his direct historic record high, which is at the 8,100,000,000 and the last number, which is only approximately over the 8,000,000 and this represents a growth of 7% as well, mainly contributed from the semiconductor and photonics testing solutions. Which increased on a 22% compared to the year of 2018. To the 2020 this year, that our, outlook for this year, in in couple of the aggregates. The first one is the, we, assume the rapid development of the AI IoT, which is representing the AI plus the IoT. Increased the demand of high performance GPU, CPU sensors, RF connections, etcetera. This will be continuously tracked the sales growth in Semiconductor And Photonics testing solutions particularly from several areas. The first one is the high grade ability testing solutions, such as the burn test or SLP testing. For the XL and the time of flight testing for the 3 d sensing, the third one is for the optical fiber communication system, mainly using the India, telecommunication applications. Second one is for the test instrument and APS for power testing solutions we assume it still will be focusing on the grain energy. This will be including, like, EV related components battery model and the pack and smart grid and the 5G generation related power testing. The third one is for those EV battery cell, especially for the formation system, would be the key contribution for turnkey solutions in 2020. And the last one is the inline nanopolitical monitoring system. This is a breakthrough technology developed by our subsidiary. Innovative nanotech, which could precisely detect the particles down to as small as the 3 nanometers and have been adopted by foundry customers already. Those are the outlook for the 2020. And, this is my presentation. And, right now, open for any questions for anyone. Thank you, Mister Ian. Ladies and gentlemen, we will now begin and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak please press 2 to cancel the question. First question is coming from William Chen of JP Morgan Asset Management. Go ahead please. Hello, Paul. Thanks for taking my question. Can you hear me? Yes. Yes. Thank you. Hi, Paul and Jason. So just one quick question regarding to your cash flow. So particularly to your working cap right? So in 2018, based on your financial statement, the working capital, the working cash mean, the detention cycle was about 82 days. But then that actually rose to, about 130 days in 2019. And and and I think I noticed, like, account receivable does actually increase quite a bit. Can you choose how to inform Samsung of the reason why the, cash coverage has been increased. And then what's your view on 2020? And second, you know, the follow-up question on this is cash flow. I know the guidance has some of the increased debt. And then can you talk about that? What's our balance sheet I'll look forward to the 2020. And what's the dividend payout, for 2020? You mean the AR days increase stays on a consolidated basis. Right? Correct. Correct. The consolidated basis. Well, basically, I think for the consolidation basis, that will be consolidated for all the business for Chroma. That will be the parent company plus the like the MAS and the, and your computer company. So in there, you can see that, it's alluded a little bit long. Well, due to the, increasing for the top line at the 2018, And 2018, we still level with some of the accounts receivable for those warrants and the guarantee. So that will be a leftover for the accounts receivable. But If you look at the turnover space, I think it's to us, I think it's still under the year, controllable kind of a especially for the current company. If you look at the current company now, accounts receivable turnover days, I think it's still improving. And, I think that's also the additive from the management trying to give it, as soon as possible and, and, and the moving over. As to the increasing debt, I think 2019 is a particular year that we have a lot of cash also. One of that is due to the construction for the our next headquarters on the subway 87 station project. In there, it's, 2019, it's under the kind of the construction peak and the payment as well. Okay. And for another, as also is for due to the investment on the equity investment on the accountech and it's really the company. That process, somewhere like $2,400,000,000. So that's where we are. So we are not like 2, 3 years ago, we are on the net debt actually, which is a net cash. But we're kind of using a long, long term debt to kind of adjust kind of situations and trying to get that, as, as, current as possible and trying to, pay out the cash dividend. I think cash dividend for this year, we're still maintaining the 68% payout, which is the $3 NT. This was discussed in the India this morning from the call and this is a suggestion from the call to the as soon as your holders meeting. Hi, Willie. I think the I think our debt will be gradually paying back. As you may notice for our 3rd quarter balance, and then we'll go on to 4th quarter balance, and that's actually actually a gradual decrease. I think the situation for the cash flow and debt positions will be, further reduced. I think, this this year, second half after we move to new headquarters, and then current building will be sold. Thank you so much. Oh, can I have a one follow-up question? Yeah. So so this is regarding to the OpEx. I I think that 2017 2018 was probably not a comfortable base because the, made a contribution from MIS. But if I, you know, look at 2016, then, we don't have, we didn't have the MS contribution. The, you have, you know, gross margin pretty similar to the curve in 2019, but an OpEx level in 2019 is actually much higher than for 2016. So if you have any, like, expectation regarding to the OpEx, going forward, any margins I will margins are issued should be an scenario issue because you have in in in product mix. Then just on our pack side, what should we forecast or the guidance on OpEx in 2020 onwards? I think if you compare to year 2016, I think the OpEx increased due to 2 major reasons. First one, increase, of course, especially if we enjoyed 2 year hikes from 17th 18th. We further penetrate into like a postpone effect of and then we recruit several R and D. And the second thing is, you know, every year since we are the corporate company, every year, we will increase the salary basis around 2 to 3%, you know, according to CPI. So this is normally what happens, you know, every year to increase the salary But, you know, these 2 years, you know, since the trade war issue, so we already pretty much brings our headcount numbers. So should you try the more stable, all tax, like, the absolutely low all tax numbers? I think this year, you probably need to still need to add a low single digit due to salary increase according to CVI. Okay. You used the last year of the $6 and then multiple maybe, low single doc single digit, maybe around 2 or 3 ant according to the CVR influence. Yeah. And the next question is coming from Jeff O' Waller of Macquarie. Go ahead please. First question, in the 3rd quarter earnings conference, I think you sounded a little more cautious on EB momentum in the ATS business, but it looks like 4th quarter ATS because it was very strong. So my question is, was that really E B driven? Or and if that's still what changed or else, what was really driving the strong ATS number in Fourth Quarter sequentially? Oh, okay. As you may know, for the first few quarters for 8 years, it's still, you know, behind the schedules and then budget. Still presented the decrease. And, but we've already the whole year is made up to the growth of about 4% into, larger pooling in the fourth quarter. And then it comes on 2 major products. The first one, battery pack, and battery module related. And second thing is panel related. Okay, great. Thanks. And then another ATS related question, roughly what percent of sales in ATS for your business goes to China? Oh, this is very large crushing. Very hard to ask estimate, especially after 1 year of relocation. I would say parts a. Mhmm. So for Because, you know, they graduate back on work, you know, if you have 50% Yeah. I don't know. Still confused shifting to China. So I don't know. And and that has that been disrupted at all? So far this quarter or no? No, not really. Well, Jeff, I think, at least for the first quarter, the first two months for the first quarter, I think it looks okay. And at least from our point of view for the first half of twenty twenty, I think we currently would feel comfortable. So this is where we are. And for the for the COVID ID, for the virus, standard kind of issues. Right now, it seems to us that, we don't have the token chain for the year, the 510 kind of issue. And also for our customer base, as long as they are on a certain side, I think they still, demanding us for those, backlog and trying to prepare for the shipment as long they have started to get operation. So it seems to us that only had limited, kind of, influence And, probably, part of that is the delay, but, nothing yeah. That's the Okay. You know, we we understood recently, several industry has been impacted by viruses. But, you know, currently, our customers are not have no plan to change their new products development in the sector, particularly in the second half. So if they want to have their their new products or launches, they definitely need to, you know, build out the capacity or rolling their plans on schedules. And first thing that I can highlight is, let me come back to sectors mostly or not to China. Okay? No matter SOT, VCSOs, these parts. I think maybe partial EO parts is to China, but, you know, 5 g is the key developments that China want to adopt. So so far, we didn't see anyone really controlling orders. And for power testing, I think maybe, the first half of February, we have some concern due to customer issue, but since the, you know, China is very aggressive to, you know, make everything back on track. So once we're able to deliver in the end of the month, I think for ourselves, confusion will not be a big issue. And then we haven't released in part of the first quarter, the full cover. Okay, thanks. One more question for getting to you again. Some are related on the, the turnkey business. You know, you said this year should be EV focused, information focused. What is the rough kind of China versus non China breakdown there? Well, first quarter this year, we do have a one closure which has been postponed or rescheduled from fourth quarter last year. So So, but, you know, we already start delivering, as you may notice from our general results and come to delivery in February March. And we we also have another order. It's going to deliver between second and third quarter. And this one is non China, which is through, like, a Thailand area. Okay. Great. Thank you. We're now in question and answer session. And the next question is coming from Melrose of Marshall Walls. Go ahead, please. I apologize, but thanks for taking my questions. So for I have one question regarding the the your new product nano particles. So can you help me, like, have some ideas regarding, like, how big could you do, uh-uh, maybe at the same market? Or how how should we think about the revenue contribution of this product. Is it, for example, like, VCSEL, is VCSEL a good benchmark for us to think about the contribution for the 1st year? And also regarding the customer, new customer acquisitions for this product, what's the plan for this? Because right now, we have one bunch of customers. So what's the, the the the the outlook for the customer acquisition. Thank you. We did purchase already been qualified by our foundry customers in 4th quarters, and generally time is about 3 to 4 months. And according to our Chinese calls, I think our chairman did highlight that this perspective, the pricing is around $19,000,000 $19,000,000, closer to 19,000,000. Yes. And then based on the you know, if this is not the big milestone only couple only sell a couple sets, I think our chairman would definitely not to not want to highlight. I think we do have a 2, 2 targets. The first one seems currently we only cover 2 solutions. We haven't really covered assets. Related liquid. So of course, we would like to increase our development capability to cross to other liquid type of, especially asset parts of, discrimination, having practical examination. And the other one is that we would like to, having the, set up his first customer for, you know, having a solar position before we move on to, second foundry customers. So first, we would like to expand to the potomix, and second one is volume from this particular card customers. Yeah. But, you know, this year, it's definitely, we ever mentioned this year, definitely, is the semiconductors up cycles, because customers need to upgrade those, test your show equipment you know, to meet the 1st 5 g bikers. And the second is the technology development. So now we have greatest order book for our export team type, and then we also migrate to the new customers, which is the foundry customers. Got it. Yeah. Thank you. And the next question is coming from Yuri Su of Credit Suisse. Go ahead please. Hi, Paul and Jennifer. So two questions from me. First is that, I think in the Chinese court, I mentioned the 4th quarter gross margin will debt by the higher mix long term key and and also some intercompany transaction, between from our parent company of MS. I'm just wondering, do do you think we, you do foresee any of these kind of products or transaction to happen in 2020, you know, based on your current, outlook. Giving all the tanky? Let me just forward that up, particularly. Right? Mean, lower margin? Yeah. I mean, lower margin display 20 product. Thank you for that always depending on the product mix. So, so it will be hard to answer this kind of a question, but I think the overall target for the current company still maintaining the, over 50% gross margin as the target? No, it's Thank you, first, if you take the project by project, it's not at all the changes focused low gross margins. Like, the first quarter will probably deliver a little bit of actually sold or maybe blend everything together so far. It's not that low. So it's really case by case. But I couldn't deny that that the 20 solution is a blended gross margin. Sometimes it's not as high as you view, so I think a set of testers, yeah. Okay. Thank you. And then the second question is on the the effective tax rate in the fourth quarter. I think, on both consolidated and parent level, the tax has increased quite a bit. Can you give us some color on that? You mean the parent, the tax rate? I think both parent and consolidate. Both tax were higher than third quarter. Well, there's nothing particularly that needs to be, to be focused on, which is the decided by the by the tax return being decided by tax free rule for the previous year and then it's up and down will be affecting our current tax rate. So going forward, how should we think about your tax rate? Well, we still maintain the expectation on the somewhere like a 15, 14%, fifteen percent. As the average. I think the only thing that we can get from the government is for the incentive that we can get from the government is for the R and D investment. But that's upon the, investigation and also the approval. So that's the reason why every year, where our tax return, will be reviewed and check by the tax bureau. And after a few years, then they decided, which is the, which is the right tax that we should pay. So that's the that's the option for the update gap. Okay. Got it. Thank you. You're welcome. The next one is coming from Jeff Waller of Macquarie. Go ahead, please. Got 2 more questions for me. The first one, any thoughts on any projects along with the Cantech acquisition this year or next year that you can talk about yet? Can you check? Yes. For for other acquisition projects? Well, just now, just any any projects that you're doing in terms of we'll see any any contact related revenues hitting your consolidated This this is your next year. Yeah. Contact will not consolidate it. I think they just focus the equity profiles under our non operating income. So Any projects you'll be doing for for them, though? That that that will hit your, your actual revenues. Any projects you'll be doing for them or with them Okay. We are in the middle of progress, you know, doing the technology migration. I changed those optical inspections and technology. So so far in progress. So I don't think what was your key, but based on Cantech's protection, this is your serial class processes. I think they are the only one being off your phone compared to their peers. Okay. And then the real estate sales this year, roughly what quarter do you think you'll see the gain from that sale? Well, it's, it won't be that fast like, well, this quarter or next quarter simply because it will be a long process for the migration of technology. Also, Okay. So we are talking about the new construction headquarter and also the existing headquarter for the future. Yes, correct. Well, we plan to sell it at the early as early as the 2020, last quarter or push it to, probably 2021. So this, well, according to the process, of the completion of the of the consumption, and, for the amount, well, we we didn't we didn't have the exact number yet. But, along to the, according to the regulations for the SEC, as long as we have the contract and then we have to disclose to the problem. Okay. And sorry, one last question. For your semiconductor related and photonics growth this year, Can you kind of give rough roughly what's within that kind of breakdown? What's growing the most or fastest this year? Let me call. Honestly, I do a little bit. I think this case, I'm our chairman's comment. I think This year's semiconductors could probably at least can have a 7 similar growth rate as of last year. Yeah. And then cancellation, but I think maintain a stable growth. And thank you so much. And, Kelly, we have 2 posters on 10. Mostly, the battery failed. And then you can also apply a little bit from the Nanotech there, those contributions. Okay. Great. Thank you, ma'am. I'm sorry. Oh, that would be that's all the everything for the testing of the business. Okay, great. Thank you. Ladies and gentlemen, we are now in question and answer session. Thank you. You are currently no questions. Then I'll hand it over to CFO, Pauline, for closing remarks. Mr. Ian, please proceed. Thank you, Jason. Well, my dear investors, ladies and gentlemen. Thank you for your attending, for this conference call. And for the 2019 4th quarters and also 2019, I think we enjoy a pretty like a role poster starting from low and then we come up, the record high on the fourth quarter. So this is, this is, I think it's a good result. And right now, we're still keeping on the pace and trying to, well, improve everything and trying to give up the the best records. And, before we meet next time, still, again, I wish you everyone have a very good health and, very good prosperity futures. Yes. Thank you. Bye bye. Thank you, Mr. Ian. And ladies and gentlemen, we thank you for your participation in Chroma's conference. There will be a webcast replay within an hour. Please visit www dotcomthetw/investorindex under the Investor Relations section. You may now disconnect. Goodbye.