Earnings Call: Q3 2019

Oct 31, 2019

Welcome everyone to Thomas 2019 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question For information, a webcast replay will be available within an hour after the conference is finished. Please visit www.groupa.com.tw/investor/intechs under the Investor Relations section. I would like to introduce CFO, Pauline, Mr. Ying, you may be Thank you, Mark. This is Paul Yin, and welcome, ladies and gentlemen from the tax institution and all the investors. Well, let me start off with the year 2019 1st 3 quarter consolidated income statement. I'll give you a highlight. For the first quarter of 2019. The consolidated net sales approximately is $9,400,000,000 compared to last year, 100,000,000 sorry, it's $13,000,000,000, it's a drop by 27%. But mainly, it was the, the decrease of the sales revenue of MA as compared to last year, $3,900,000,000 this year, we made approximately $700,000,000. This is a drop of 82%. But, at the same time, if we look at the gross margin, I think this is a side, which is the, the gross margin is, the gross from last year, 44% to 45%, mainly is due to the proportion of the high margin parent company sales is growing. And, for the OpEx, the level, spending level is approximately, similar to last year. So that gives us the operating income, close to CHF 1,300,000,000 in 2019. Compared to last year, $2,400,000,000, it's a 47% drop. Mainly, again, it's from the decrease of the APAS. And for the net income, the year of 2019 first three quarters, the consolidated net income, approximately BRL1.2 billion, compared to last year, TRY 2,000,000,000, this is a 39% drop. And so in here, we can see that the EPS give us approximately 3.03.03. And hit out in 2019. And then from the balance sheet side, if you look at the consolidated balance sheet highlights, we would see that there's a decrease in the cash and the short term investments, but a pretty high growth on the short term debt and long term debt I would expand that in the parent company, but mainly it was due to the spending, a very high spending on cash at the third quarter. And for the turnover, of inventory and the accounts receivable, it reveals a pretty higher turnover base at the 2019 first three quarters. What mainly is from the parent company or the inventory level is pretty much on a growing base and preparing for the fourth quarter or all the way through the next year first quarter kind of shipment. And for the accounts receivable, it was due to the Last year, the consolidated sales revenue is growing pretty fast. And this year, it drops you to the MS decreasing on the sales revenue. So that it remains, for those, accounts receivable on, on the, book what keeps the higher kind of turnover rate and should be improved approximately on the 2020 next year. Okay. For the quarterly numbers for the highlights, the sales revenue of the parent company, approximately 1.9 $1,900,000,000. This is a 4% down on a quarter over quarter basis and and a plus on a year over year basis. The gross margin is still maintaining 52%. The operating market approximately 23%, which is pretty, combined with the expectation of the management. And for the net income, it's NT 480,000,000. This is a 1% up on a quarter over quarter basis, but it's a down from the year, a 22% on a year over year basis. Mainly due to the, for the, for the, for the net income contribution from the MAS. So for the third quarter highlights, the growth of the 2nd quarter is mainly contributed from the semiconductor and photonics testing. Which would represent a growth of 20% on a Q over Q base and a 24% on a year over year basis. And for the 3rd quarter, financial numbers, if we look at the, 3rd quarter itself, you will see that, compared to the last quarter, you will see there is percent drop on the on a sales revenue base. But compared to last year, it's pretty much flat. Well, this gives us another observations, which is normally supportive will be the peak season. But this year, seems to us that pretty comply with the number we made on the second quarter. And gross margin is still maintaining like 52% and compared to last to the last quarter, it's a 2% drop and compared to the last year, it's a 2% up. And for OPEC, we look up the numbers, compared to, the last quarter, the OPEC is controlling and pretty okay. So I think that level is pretty much the same. The absolute number is, even over the lower than last quarter and compared to last year as well. The operating income, approximately $444,000,000, and this is a 9% growth. Compared to last year, it's a 13% growth. But again, down to the bottom line, we made 480,000,000 at the 4th, 3rd 3rd quarter. And this is a 1% up, compared to the last quarter and 22% drop. Compared to last year. And this is because the $1.16 in dollars as the EPS for third quarter. If we look at the parent company for the 1st 3 quarter on 2019, again, the net sales, approximately $5,500,000,000 compared to last year, 5.8. This is a 5% drop. But the margin is pretty much flat on your gross margin, which is up 52%. But on the amount, which is the 5% drop, comply with the dropout via top line. And for the OpEx, the 1st 3 quarters compared to last year is pretty much similar. So the operating income come to $1,100,000,000. And compared to last year, this is an 8% drop. And down to the bottom line, again, for the 1st 3 quarters, the net income for the 1st 3 quarter of 2019 is 1.2 $1,000,000,000 and compared to last year, $2,000,000,000, this is a 40% drop. Again, the main reason coming from the subsidiary MAS drug on the on the top line and also the contribution of the net income. So the for the 1st 3 quarter earnings per share is $3.03 again compared to last year. This is the 40% drop. And about the balance sheet highlights, if we look at here, you will see that the cash and short term investment dropped by somewhere like $1.3,000,000,000. And the short term debt, both short term debt and long term debt is growing. What mainly is from the short term debt is to match up with the dividends we paid on the third quarter. And again, the long term debt is also due to long term debt growth is also due to the the spending that we, we open, we make the we acquire the Cantech Israeli AOI company 20 percent shares, approximately $2,400,000,000. And also plus the new headquarters in 87, airport, MRT, station. The contractor. So in there, you will see that, the growth of of the, the the shopping debt and the long term debt of I think along with the strong, the earning power and also the operation that we made this year, Normally, I think the short term debt will be recovered by somewhere like, next year, 1st 2nd quarter. But the long term debt pretty much match up with the long term investment. And that gives us the, a little bit, high on the amendment to equity this year, from last year, 4% to 28%. But again, this is This was due to the spending, all on the, lending on the third quarter, I guess mention. One is for the cash dividend. We pay, like, a 1,700,000,000, and the other one is a contact investment. Realized, at the third quarter, and the payment is around RMB 2,400,000,000 and rest of that will be constructed for that So this is for the high of the balance sheet. And, the next one will be the operation highlights. If we look at the 3rd quarter product mix and the consolidated sales breakdown, you will see that in the third quarter, the test instrument and automatic testing systems, ATS, we made around $1,100,000,000. And this is, this is a 5% drop on the year over year base and 14% drop on the Q over Q base. For the semiconductor and photonics testing solutions, we made around $700,000,000 and this is a 20% growth on a Q over Q base and the 24% growth on a year over year basis, which is a very strong growth and although it's quite long with our expectations. And the turnkey solutions, again, on the 3rd quarters, we didn't make many contribution, all the equipment this quarter. And, this is an 11% drop on the over a few days and a 54 percent drop on our year over year base. But again, for these sectors, we do believe that will be improved at the 4th quarter. And so that the total consolidated testing equipment business comes up to $2,400,000,000. And this is a 7% drop on a Q over Q base, but it's a 3% growing on the year over year base. Again, MAS will be, will be dropped like, like, 66% compared to last year. And new material, again, this is only a 5% kind of deviations compared to last year. And this is the 3rd quarter. So the, again, for the 3rd quarter, the consolidated sales for the year for the total pro form a group that will come to the US3.4 billion dollars And this is a 4% growth on the a few over 2, but, on 13% drop on the year over year basis. So for the 1st 3 quarter, for the 4th 3 quarter, For the mix and consolidated sales breakdown, we will see that, again, For the total, consolidated adjusted improvement in business will be, comes to like a $7,100,000,000 And compared to, last year, this is a 3% drop. And, again, for the traditional and, and the legacy product like test instrument and, automatic and testing system. That will be a 2% drop on the year over year base. And for the semiconductor, again, this is this is a 9% growth compared to last year. 10 key solutions, we're still waiting for the year. The the the achievements on your 4th quarter. So this is a 61% drop on a year over year basis. Again, for MAA, it's a 82% drop on the, on the, the total top line, we made around $700,000,000. And for the total 3 quarter 2019, Consolidated sales revenue has come to a $9,400,000,000 and which is a 27% drop compared to last year. Well, for the 1st 3 quarters of 2019, the consolidated sales revenue Again, I just mentioned it's a 9,400,000,000. And this is a 27% decline, on a year over year basis. And gross margin, we can maintain to somewhere like 49%. And for the 2019, the overall outlook The testing instrument business sales in the second half, we expect will be further improved compared to the the first half due to the following couple of reasons. 1 of that is the we expect a short term weakness in the EV market due to the cooling impact on the China economy and the swing from subsidy reductions. However, we still think that the long term EV demand on very positive added And for the China localize the vendor policy and the acceleration of the 5G market development, continue to drive the sales, of the, semiconductor and photonic testing solutions. And improving the VRSI sensors and the VCSEL and the top for 3 d sensing and optical fiber communication for 5g infrastructure CapEx, this is the 2nd, factors. The third factor is the 2 key project We expect in second half, including the automation projects and the, EV battery cell formation systems will give us the contribution for the 2nd half sales revenue. So this is for the 2019, all the guidance. Now any questions from anyone. We're now picking up question and answer session. If you have a question for any of today's speakers, please press 1 on your telephone keypad. And you will enter a queue. After you are announced, please ask your question. If you find that your question has been answered before it is returned to please press 2 to cancel the question. Thank you. Our first question is coming from Jeff Ohler Macquarie. Go ahead please. Thanks for taking the question. You mentioned, you know, you bought a lot of the inventory or materials ahead of, fourth quarter 1st quarter sales. Talk a little bit about, you know, what's the the outlook for fourth quarter. I don't know if if you need any kind of more detailed numbers or kind of outlook for 2020 in terms of what's growing, what would be, more difficult growth? Thank you. In 1st in 4th quarters, we will not be a low season as the usual happens. And the major growth is obviously is Kanban alternative solutions. Based on our statements, we have, like, in the back, you sell orders to be delivered in the 4th quarter. And also another automation project that will be made up the 20 solutions the whole year. Will be similar to last year. Last year number is RMB780,000,000. So you can do a legally calculation. You probably come out with the 4th quarter how much we're going to deliver in turnkey solutions. Another big driver is actually come from the sending contractors. Maybe we mentioned before that from, like, 3rd quarter and to 4th quarter. I think should be 4th quarter to 1st quarter Q2 project will continue to build our capacity and prepare for next year, components needs. So I think 1st few quarters, the biggest drivers do come from the 5G, the E, whether pastured demand. And so the 1st few quarters, semi contacted I think it's pretty much ARPU for, I think, especially for Second And Third Quarter. And the biggest driver, as we stated, mainly comes from the VFAI, which is because the Chinese makers are local wise vendors, policies. And for for the big traction mostly comes from the e r wafer, which is preparation for 5 gs market. So I think, the whole year, for testing equipment business, I've been parent only. You may I think I I couldn't give you the financial guidance, but I think we'll not be very much different to what we've guided at the beginning of the year. Yes. Okay. Thanks, Jennifer. And then one last question. What's your CapEx for this year, next year, you know, given the headquarter, building. Okay. The CapEx this year, because if spending, obviously, it comes from Camtek 2. Almost 2,400,000,000 to $17. And, I think a little bit is comes from I mean, a little bit. I mean, for investments for for our new land is roughly 700,000,000. Yeah. So this is our 2 largest spending in this year so far. And this next year, we are about to look to new buildings, but we probably will have a disposal gain for our current buildings. So this is sort of the CapEx you probably normally further CapEx needs next year, but due to significant cash inflow. Thank you. Thank you. Our next question is coming from Gerry Suisse. Go ahead please. Hi. I'm Paul Jennifer. I think I just want to, ask you about the on the semiconductor side. Apparently that you mentioned the momentum is still quite strong, at least until 4Q and potentially what you have in the first quarter next year. I'm just wondering what is your thought on 2020, especially with, the continued channel utilization. And potentially more, more 5G adoption. Sorry. For semiconductor, we actually benefit by 2 major drivers, first one, Chinese local life vendors. And this will be beneficial to our traditional semiconductor tester, which is primarily part. As you can consider, we're definitely as a local vendor for China. Compared to US providers or other country providers. Another one is, I think, we also benefit because the trade war, reason are I hope we're going to highlight the customer's name at this moment, but next year, we do see several foreigner will be gradually moving out. I mean, special semiconductor player will be have a relocation need to Southeast Asia. Due to this trade war team, because, I mean, in case for the trade war relocation. Yeah. Yeah. But decision. There will be another capacity ramp in the presentation. And, this is all related if it will contribute to our SLC demand. And another part is to continue driving our semiconductors is a big so sorry, the response related. And, based on the, you know, 5 gmarket demand plus, the big photo, as you notice, is continuing to add your capabilities. I think I think the semiconductor probably will be having some progress next year. And another slide is we we do have some, progress in our foundry business. So there will be another catalyst. Okay. Got it. And then, second secondly, on the on on the MIS business. I don't know if you can give us more updates on what's going on. I think apparently the numbers looks to be tracking weight below what you have guided during the year. Well, and as still maintaining, we still observe the situation changes. Again, we're pretty conservative. So if there's no down pay, then there there would be no no deal. So, we still update that. But again, they still, maintaining connections and also, discussing for the for the project. Project's still ongoing, but the matter is, we're not going to prepare anything, for them, unless they they pay off the account pay. I think that's the situation right now. Based on our collection so far, I think as you can notice that for 1st 3 quarters already reached about 700,000,000 but we do have some down page which will be converted to sales in the fourth quarter. So you probably just added some, I mean, you know, so definitely you have some sales revenue for math in the fourth quarter. So you just added from 700,000,000. Okay. Got it. And then, lastly, I think, still wanna follow-up on the relocation. Jeff mentioned, besides these semiconductor customers for SOT, which I've mentioned, how about the progress on the other, power or, you know, EV or other customers that are using, you know, that could potentially drive your demand on the, electrical testing. What's the progress there? I think, China, especially for battery cell. Demand. I think this part of business due to subsidy cost is kind of a slowdown that he fell particularly. So next year, think the indie driver, especially for back to sale portions, will be mainly come from overseas. As you as we mentioned in to July's earnings call, we mentioned that we do have another over in Thailand. Yeah. We'll just reschedule to next year. So maybe our exposure next year regarding devices sold would be mainly outside of China. Yeah. Okay. And then how about for other components other components, adjusted E B on the relocation side? We we we see yeah. We see Actually, for the trade war situation starting from last year, second quarter all the way to 1st quarter of this year, I think this is a kind of like, the headwinds are very strong. So everybody has to, make their decisions and to move or not to move But, if it's, moving decision, when and where, I think until, around 2nd quarter to 3rd quarter, I think most of the situation has, clear So it seems to us here and there, we pick up some of the additional orders from the extension they they they already made make up their mind, they're moving back to Taiwan or to Southeast Asia, or to somewhere else, like, like, India. So that type of decisions will be, I would say, been decided, but not that bad happening if they don't have that kind of permit. The location is always ongoing. I think as we said before, it takes at least 1 or 2 years. And we never receive a sometime rush order in the fourth quarter for our power testing. Because we're location. So this is just continue on. Thank you. Thank you. The next question is coming from Angus Rain, HSBC. Go ahead please. Oh, hey, guys. Can I hear you? Yes. Yeah. So I'm sorry about that. You previously said that, It just said that a second half strength may come from semi customers or location out of China. Right? Is there Is that a new incremental demand, or that's just more of a CapEx, which supposedly should have been happening late, early this year, but now push back to second half of this year. So I just wondering if that, the location demand for you guys is an incremental demand for it. Not to push back till now and you are starting to ship your passengers, in second half or, until maybe, like, February or next year? It's not a push, to the next year. I just So you can notice the I mean, the trade war issue and also the, you know, the Hong Kong and then China's attention. Which is because some foreigner will may decide to pull out from China. And the and then they also plan to add more capacity. Maybe Southeast Asia Government provide some, you know, incentive scheme or other reasons, but customers not only move also from the China side, but also expecting to add a double capacity in the Southeast Asia. Yeah. This is possible to happen in the first half next year. I see. Okay. I want a special highlight. We mostly deal with logic. We don't deal with mostly deal with LogiIC. We don't deal with members. Okay. Okay. So I think for the battery cell, order that you guys, so so you just mentioned that battery cell order, in in overseas market, is that, is that the project from by, made by older customer or overseas customers? Or made by Chinese customer, but they are relocating our enterprise China into the overseas factories. So overseas customers not the Chinese speakers. Oh, okay. And Maybe, okay, China is a big car. I think the major impact is on battery cell industry, particularly. But the newer markets continue to, you know, promoting the e commerce app. So still have this kind of BICC cell demand. But, reason in case we mostly receive the for next year is all the season for makers. On falling side. Okay. I see. So for next year, basically, based on your current visibility, let me add on. And next shift there is also the strength will come from argument on overseas aspects. Yes. Okay. And my last question, for now is, I remember, for 5 g in China, you guys provide testers for e l. Right? And that's mostly for the 5 g infrastructure field. And I'm just curious about because Right now, we are seeing more, like, smartphone OEMs and smartphone rates on supply chain are building up for, next year's maybe potentially 5 g enabled smartphones. I'm wondering because, based on my knowledge, you guys provided mostly to our gene infrastructure, maybe next year and going forward, it's going to be more, 5 gs smartphone devices kind of CapEx run. So do you guys also address that? I discussed these topics within another investors on the other day, How to say? Actually, if you really run 5G smartphone, there's not really a difference. Mean, for optical fiber, there won't be like infrastructure or forms. Because eventually, if you're based on refer to wider internal content, optical fiber eventually will become not only for infrastructure, but door to door and even on your PCV board and no devices. So there is I mean, if you just talk about optical fibers, application. There's no there's no limit. So according to customer's plans, I think I mentioned before, customer plan is the the the demand this year comes versus last year. If you consider last year as a 1, This year's made double. Next year's made triple versus this year. So it's just the infrastructure, I think I don't think they probably would not mean that much. Oh, okay. I see. Thanks a lot, Jennifer. Thank you. Thank you. Our next question is coming from Jerry Tsai, JP Morgan. Go ahead please. Okay. Thank you. Thanks for taking my call. Just, I think as a follow-up question, do you I think Paul was mentioning something about the EV weakness, is something you have to just is this something you have recently started witness or, or maybe you can tell us a little bit more detail about it and how how's impacting your ATS business? Short term. Well, short term, you will see that the Chinese government, they're trying to restructuring the subsidy policies for the EV, especially for those manufacturing business all the way to the battery business. So, I think there's a restructuring for that business. But short term, I think that will be still affecting those investments on the APAC spending. For that industry. So it doesn't mean that they, when you say short term, it doesn't mean that, it was it should be, finished, sometime this year, or it could actually last for into, 2020. Sure. I mean, we would see that the momentum for the investment for the EV industry in Managed China is getting weaker. And at least from the third quarter all the way probably to the next year. We still well, just like Jennifer mentioned, I think for the easy business, we still think that that will be like a trend for the energy saving industry But, but just in China, I think it's pretty strong in the last few years due to the, subsidy policy from the government. But right now, as long as the subsidy policy has been cut or restructuring, then it will reduce the that kind of investing momentum. So, so, from a from a 2019 perspective, is it could I could you actually see decline on year on year basis, for ATS? Because because there's kind of a weakness, like Well, I think for it's not much. I think first three quarters, thing is to, the biggest contribution. For our ATMs to come from in the market. The 4th quarter, a really large decline. But we're just for fees. It could be have some correction in the coming quarters. As you can notice a lot yesterday's build out guidance, I think I think that's quite the same thing. But, you know, as I say, the coal market is very fragmented, I just say this could be have some impact. Did you just say you expect ATS to be down a lot in the fourth quarter? I'm sorry. No. I say no. So far, it's okay. Because lots of declined. So you it's rather stable versus okay. So we're just expecting this could be because the battery is still in China. You know, become very conservative. Where do you expect if the market's slowing down maybe in France to downtrend? We still need to keep eye on this. So currently, 4th quarter is not very big much change. Okay. I see. Okay. That's great. One one more question, about this M a s, because I understand there's some this this, visibility is probably difficult to to to to be to to to to become up at this point, but then, I'd like to know at this point that I'm your, accounts receivable. Do you have any, sizable exposure to this counterpart? Okay. I received your question, yeah, the other day regarding to AR accounts receivable. Okay. I after ISR, it's, there is a there is a term, which is the that we can find these We do have the receipt in here, the bank. So now the the term has been changed to so called contractibility. So we do a little bit of just to reflect our true AR turnover. So, actually, that AR is not that big amount as you need for the final statement because that is not taken out there. The month of the dollar we have been collecting for the rest. So, actually, our credit exposure is not as big as you you state. And also, we do we do some provisions based on accounting policy. Okay. Well, basically, I think for the for the residue or account receivable for the, I think probably only, a 6% percentage of the, the sale program they made on the, 2018. And approximately, that will be somewhere like 10% for the warranty and, and and the rest of the process. I'm sorry, Paul. You mean, like, if this, let me ask the revenue was not back in 2018, it was about close to 55,000,000,000. So you say the the account we see for equal to about 6% of that? 10%. Okay. 10% of that. Okay. Warranty. Yeah. That's for the warranty for the for the shipment. If you okay. What vehicle is being you really want to talk about credit risk and then you have to reverse, then that will be 10% warranty, which is according contract, we only can collect 1 one and a half years later. If these companies went bankrupt and then we the part we couldn't collect. Okay. Okay. Thank you. That's good. The next question is coming from George Chuubang. Go ahead please. Hi, Paul and Jennifer. Could you help us just try to picture the MIS business for the year 2020. Would it be what will be a baseline case in terms of revenue size. Obviously, this business has been quite volatile in the last couple of years. Do you think a $2,000,000,000 revenue contribution is more or less reasonable? I think except for last year, last year was just a totally exceptional high for math. I think in the past, the average is always strong. It's around between 1 or 2,000,000,000. So you want to project, like, a very concept discount with RMB 1,000,000,000. That's quite reasonable. But, I think the import the the key point here is math math is a project based company. So Every year project could be big, could be smart. And our keys to decide the size is collection. Okay. Thank you. The next question is coming from Jared Su, Credit Suisse. Go ahead, please. Two follow-up questions. One is that, I think I remember, you previously said semi plus photonics, the segment revenue, could be going back to 2017 level. I'm just wondering, is this still holds after the 3rd quarter results? Possible. Sorry? Possible. Possible possible. We'll hold. We'll we'll still meet that Should I confirm the number? Should I give you No. Anyway, okay. That's fine. And then, another question is on the non gains in the third quarter, I think you have started to consolidate well, in that concern, it's hard to to book the contributions from Kintech. Could you quantify how much, you know, you have a book from Kintech in the third quarter? Not yet. Camtek Nas not yet close to the book of, from a yes. Okay. Well, we forecast the investment at the third quarter end. Okay. So starting for 4Q, we could see some investment gain from contact? Yes, but minimum, yes, but not that material. Based on the, well, on a top line expectation from them, which is, somewhere around, one Okay. $131,000,000 $130,000,000, I think to 150,000,000 US dollars, somewhere like that. I think. Okay. So in 3rd quarter, So then on 3rd quarter, on the operating side, what is the main contribution? From the consolidated, the group net income. Okay. The from the overseas, From the overseas operation. Okay. Got it. From the 100% on the subsidiaries. Okay. And then, yeah, I also mentioned that there will be some, divestment of your buildings Can you give more more colors on that? You know? You already have fire. We already The current existing headquarters? I think for both current season order at also the newer 87. Okay. I think we just finalize the contract with, outside contractors for the, for the residential, for residential buildings, building. So that will be somewhere like 4 years after. So it's a long term kind of a project. But for the current headquarters, we already have, we already have potential buyers and we sign a kind of preliminary kind of, NDA I think, 2 years ago. And, expect this deal will be nailed down like, next year. Okay. So it will be more 2020 then? Yes. Better be 2020. Welcome. We are now in question and answer session. There are currently no questions. I will hand it over to CFO, Paul Yin, for closing remarks. Ms. Inc. Please proceed. Thank you, Mark. Well, I think for the first quarter, it's a it's a pretty, untraditional kind of, third quarter. Compared to the past few years. So here, we are expecting that Fourth Quarter can give us some improvement on your top line then give us, a strong, a stronger, second half of twenty nineteen. And letter can have, at least, match up with the sales revenue on your parent company compared to last year. So thanks for your attention. And, until next time, Thank you. Bye bye. Thank you for your participation in very much conference. 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