Welcome everyone to Chroma's 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 and answer session. Please follow instructions given at a time if you would like to ask a question. For information, a webcast replay will be available within an hour after the conference is finished. Please visit www.chroma.com.tw/investor/index under the investor relations section. I would like to introduce CFO, Paul Ying. Mr. Ying, you may begin.
Thank you, Mark. This is Paul Ying. Welcome, ladies and gentlemen, from all the institution and all the investors. Let me start off with the year 2019 first three quarter consolidated income statement, give you a highlight. For the first three quarter of 2019, the consolidated net sales approximately is TWD 9.4 billion. Compared to last year, it's TWD 13 billion. It's a drop by 27%. Mainly, it was the decrease of the sales revenue of MAS compared to last year, TWD 3.9 billion. This year, we made approximately TWD 700 million. This is a drop of 82%. At the same time, if we look at the gross margin, I think this is an upside, which is the gross margin is growth from last year, 44%-49%. Mainly, it's due to the proportion of the high margin parent company sales is growing.
For the OPEX, the spending level is approximately similar to last year. That gives us the operating income close to TWD 1.3 billion in 2019. Compared to last year, TWD 2.4 billion, it's a 47% drop. Mainly, again, it's from the decrease of the MAS. For the net income, the year of 2019 first three quarters, the consolidated net income approximately TWD 1.2 billion. Compared to last year, TWD 2 billion, this is a 39% drop. In here, we can see that the EPS give us approximately TWD 3.03 in 2019. From the balance sheet side, if you look at the consolidated balance sheet highlight, you will see that there's a decrease in the cash and the short-term investment, but a pretty high growth on the short-term debt and long-term debt.
I will explain that in the parent company, but mainly, it was due to the very high spending on cash at the third quarter. For the turnover of inventory and accounts receivable, it reveals a pretty high turnover rate at the 2019 first three quarters. Well, mainly, it's from the parent company or the inventory level is pretty much on a growing pace and preparing for the fourth quarter all the way to the next year first quarter kind of shipment. For accounts receivable, it was due to the last year, the consolidated sales revenue is growing pretty fast, and this year it dropped due to the MAS decreasing on the sales revenue. It remains for those accounts receivable on the book what keeps the high kind of turnover rate and should be improved approximately on the 2020 next year. Okay.
For the quarterly numbers for the highlight, the sales revenue of the parent company approximately TWD 1.9 billion. This is a 4% down on a quarter-over-quarter base and a flat on a year-over-year base. The gross margin still maintaining 52%. The operating margin approximately 23%, which is pretty comply with the expectation of the management. For the net income, it's TWD 480 million. This is a 1% up on a quarter-over-quarter base, but it's a down on the 22% on a year-over-year base, mainly due to the net income contribution from the MAS.
For the third quarter highlights, the growth of the second quarter is mainly contributed from the semiconductor and photonics testing, which represent a growth of 20% on a quarter-over-quarter base and a 24% on a year-over-year base. For the third quarter financial numbers, if we look at the third quarter itself, you will see that compared to last quarter, you will see there is a 4% drop on a sales revenue base. Compared to last year, it's pretty much flat. Well, this gives us another observation, which is normally third quarter will be the peak of the season, but this year it seems to us that pretty comply with the number we made on the second quarter. Gross margin still maintaining like 52%, and compared to the last quarter, it's a 2% drop, and compared to the last year, it's a 2% up.
For OPEX, if we look at the numbers, compared to the last quarter, the OPEX controlling pretty okay. I think the level is pretty much the same. The absolute number is even a little bit lower than last quarter and compared to last year as well. The operating income approximately TWD 444 million, and this is 9% growth. Compared to last year, it's a 13% growth. Again, down to the bottom line, we made TWD 480 million at the third quarter, and this is a 1% up on a quarter-over-quarter base, but it's a down on the 22% on a year-over-year base . This gives us TWD 1.16 as the EPS for third quarter. If we look at the parent company for the first three quarter on 2019, again, the net sales approximately TWD 5.5 billion. Compared to last year, TWD 5.8 billion, this is a 5% drop.
The margin is pretty much flat on the gross margin, which is 52%, but on the amount, which is a 5% drop comply with the drop of the top line. For the OPEX, the first three quarter compared to last year is pretty much similar. The operating income come to TWD 1.1 billion, compared to last year, this is an 8% drop. Down to the bottom line, again, for the first three quarters, the net income for the first three quarter of 2019 is TWD 1.2 billion. Compared to last year, TWD 2 billion, this is a 40% drop. Again, the main reasons coming from the subsidiary, MAS, drop on the top line and also the contribution of the net income. For the first three quarter, earning per share is TWD 3.03. Again, compared to last year, this is a 40% drop.
About the balance sheet highlights, if we look up here, you will see that the cash and short-term investment dropped by somewhere like TWD 1.3 billion. Both short-term debt and long-term debt is growing. Well, mainly it's from the short-term debt is to match up with the dividends we paid on the third quarter. Again, the long-term debt growth is also due to the spending that we acquired the Camtek, the Israeli AI company, 20% shares, approximately TWD 2.4 billion. Also plus the new headquarters in A7 Airport MRT Station, the construction. In there, you will see that the growth of the short-term debt and the long-term debt. I think along with the strong 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, first to second quarter.
The long-term debt pretty much match up with the long-term investment. That gives us a little bit high on the net debt to equity this year from last year, 4%-28%. Again, this was due to the spending all on the lending on the third quarter. I just mentioned one is for the cash dividend. We paid like TWD 1.7 billion, and the other one is the Camtek investment, realized at the third quarter, and the payment is around TWD 2.4 billion. The rest of that will be the construction for the A7. This is for the highlight of the balance sheet. The next one will be the operation highlight.
If we look at the third 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 TWD 1.1 billion. This is 5% drop on a year-over-year base and 14% drop on a Q-over-Q base. For the semiconductor and photonics testing solutions. We made around TWD 700 million ATE. This is a 20% growth on a Q-over-Q base and a 24% growth on a year-over-year base, which is a very strong growth. Although it's quite along with our expectations. The turnkey solutions, again, on the third quarter, we didn't make many contribution or the shipments this quarter. This is an 11% drop on the Q-over-Q base and a 54% drop on a year-over-year base.
Again, for these sectors, we do believe that will be improved at the 4th quarter. The total consolidated testing equipment business comes up to TWD 2.4 billion ATE. This is a 7% drop on a Q-over-Q base, but it's a 3% growing on a year-over-year base. Again, MAS will be dropped like 66% compared to last year. New material, again, this is only a 5% kind of deviations compared to last year. This is the 3rd quarter. Again, for the 3rd quarter, the consolidated sales for the total Chroma group, that will comes to the TWD 3.4 billion. This is a 4% growth on the Q-over-Q, but on 13% drop on the year-over-year base.
For the first three quarter, for the maintain the consolidated sales breakdown, we will see that, again, for the total consolidated testing equipment and business will be comes to like a TWD 7.1 billion ATE, and compared to last year, this is a 3% drop. Again, for the traditional and the legacy product like test instrument and automatic testing system, that will be a 2% drop on year-over-year base. For the semiconductor, again, this is a 9% growth compared to last year. Turnkey solutions, we're still waiting for the shipments on the fourth quarter, so this is a 61% drop on a year-over-year base. Again, for the MAS, this is a 82% drop on the total top line. We made around TWD 700 million.
For the total three quarter 2019 consolidated sales revenue has come to a TWD 9.4 billion ATE, and which is a 27% drop compared to last year. Well, for the first three quarter of the year 2019, the consolidated sales revenue, again, I just mentioned it's TWD 9.4 billion, and this is a 27% decline on a year-over-year base. Gross margin, we can maintain to somewhere like 49%. For the 2019, the overall outlook, the testing instrument business sales in second half, we expect will be further improved compared to the first half due to the following couple of reasons. One of that is we expect a short-term weakness in the EV market due to the cooling impact on the China economy and the swing from the subsidy reductions. However, we still think that the long-term EV demand on very positive attitude.
For the China localized vendor policy and the acceleration of the 5G market development continues to drive the sales of the semiconductor and photonics testing solutions. Including the VLSI testers and the top for 3D sensing and optical fiber communication for 5G infrastructure CapEx. This is the second factors. The third factors is the Turnkey project, which that in second half, including the automation projects and the EV battery cell formation systems, will give us the contribution for the second half sales revenue. This is for the 2019, the overall, the guidance. Now, any questions from anyone?
Yes. Thank you. We're now beginning our question and answer session. If you have a question for any of today's speakers, please press zero one 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 your turn to speak, please press zero two to cancel the question. Ladies and gentlemen, we're in question and answer session. Please press zero one on your keypad to ask the question. Thank you. Our first question is coming from Jeff Weller, Macquarie. Go ahead, please.
Thanks for taking the question. You mentioned you bought a lot of the inventory or materials ahead of fourth quarter and first-quarter sales. Can you talk a little bit about what's the outlook for fourth quarter? I don't know if you can give any kind of more detailed numbers or any kind of outlook for 2020 in terms of what's growing, what maybe more difficult growth. Thank you.
In fourth quarters, we think will not be low season as the usual patterns. The major growth obviously comes from our turnkey solutions. Based on our statements, we have E-bagging sale orders to be delivered in the fourth quarter, and also another automation project. That will be made up, the turnkey solutions, the whole year will be similar to last year. Last year's number is TWD 780 million. You can do a little calculation. You probably come out with the fourth quarter, how much we're going to deliver in turnkey solution. Another big driver actually comes from the semiconductors. Maybe we mentioned before that from a third-quarter end to fourth. I think should be fourth quarter to first quarter, pure projector will continue to build our capacity and prepare for next year component needs.
I think first few quarters, the biggest drivers still come from the 5G, the wafer tester demand. The first few quarter semiconductors, I think is pretty much up to four. I think especially second and third quarter. The biggest driver, as we stated, mainly comes from the VLSI, which is because the Chinese makers are localized vendors policies. For the VCSEL tester mostly comes from the wafer, which is preparation for 5G market. I think the whole year for testing equipment business, I think current only. I couldn't give you the financial guidance, but I think will not be very much different to what we got in the beginning of the years. Yes.
Okay. Thanks, Jennifer. One last question. What's your CapEx for this year, next year, given the headquarters building?
Okay. The CapEx this year, our biggest spending obviously has come from Camtek, almost TWD 2.4 billion. I think for investments for our new land is roughly TWD 700 million. Yeah. This is our two largest spending in this year so far. Next year, we are about to move to a new building, so we probably will have a disposal gain for our current buildings. This is sort of the CapEx, and we probably no need further CapEx needs in next year. I think it's significant cash inflow. Yeah.
Okay. Thank you.
Sure.
Thank you. Our next question is coming from Jerry Su, Credit Suisse. Go ahead, please.
Hi. Hi, Jennifer. I think just want to ask you about the semiconductor side. Apparently, you mentioned the momentum is still quite strong, at least until 4Q and potentially what you still have in the first quarter next year. I'm just wondering, what is your thought on 2020, especially with the continued China localization and potentially more 5G adoption?
For semiconductor, we actually benefited by two major drivers. First one, Chinese localized vendors. This will be benefit to our traditional semiconductor tester, which is Semtech parts. As you can consider, we definitely as a local vendor for China, compared to U.S. providers or other country providers. Another one is, I think we also benefit because of the trade war. I probably couldn't highlight the customer's name at this moment, but next year we do see several foreigners will be gradually moving out. Especially semiconductor player will have a relocation need to Southeast Asia due to this trade war.
Relocation decision.
Yeah. There will be another capacity grant in Southeast Asia. This will contribute to our ATS demand. Another part is continuing driving our semiconductors is the photonics related. Based on the 5G market demand, plus the VCSELs, as you notice, we continue to add capacities. I think the semiconductor probably will have some progress next year. Another side is we do have some progress in our foundry business, so there will be another catalyst.
Okay. Got it. Secondly, on the MAS 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 way below what you have guided early in the year.
MAS still maintaining. We still observe the situation changes. Again, we are pretty conservative, if there's no down payment, then there will be no deal. We still observe that. Again, they're still maintaining connections and also discussing for the project. Project's still ongoing, but the matter is, we're not going to prepare anything for them unless they pay all the down payment. I think that's the situation right now.
Based on our collection so far, I think as you can notice that for first quarter, already reached about TWD 700 million. We do have some down payment, which will be converted to sales in the fourth quarter. You probably just added some, definitely we have some sales revenue from MAS in the fourth quarter, so you just add up from TWD 700 million.
Okay, got it. Lastly, I think I still want to follow up on the relocation that you have mentioned. Besides these semiconductor customers, for SLT, which you have mentioned, how about the progress on the other power or EV or other customers 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 some things, has kind of slowed down. Battery cell particularly. Next year, I think the EV driver, especially for battery cell portions, will be mainly come from overseas. As we mentioned back to July's earnings call, we mentioned that we do have another order in Thailand. Yeah, which is rescheduled to next year. Maybe our exposure next year regarding to battery cell will be mainly outside of China. Yeah.
Okay. Then how about for other components, rather than just EV, on the relocation side?
I think we see, actually, for the trade war situation, starting from last year, second quarter, all the way to first quarter of this year, I think this is kind of like the headwind, very strong. Everybody has to make their decisions and to move or not to move. If it's a moving decision, when and where? I think until around second quarter to third quarter, I think most of the situation has cleared up. It seems to us that here and there, we pick up some of the additional orders from the expansion. They already made up their minds. They're moving back to Taiwan or to Southeast Asia or to somewhere else, like India. That kind of decisions will be, I would say, being decided, but not that fast happening if they don't have that kind of order.
Relocation's always ongoing. I think as we said before, it takes at least one or two years. We even received some kind of rush order in the fourth quarter for our power testing because relocation. This is just continuing on.
Okay. Thank you.
Thank you.
Thank you. The next question is coming from Angus Lin, HSBC. Go ahead, please.
Hey, guys. Can you hear me?
Yes.
Yes.
Yeah. I'm curious about that. Previously, you said that second half strength may come from some semi customers relocation out of China, right? Is that a new incremental demand or that's just more of a CapEx, which supposedly should have been happening early this year, but now pushed back to second half of this year? I'm just wondering if that relocation demand for you guys is an incremental demand or not, just pushed back to now and you are starting to ship your testers in second half or until maybe like first quarter next year?
Hi, Angus. It's not a push to next year. As you can notice, the trade war issue and also the Hong Kong and China's tensions, which is because some foreigner will may decide to pull out from China. They're also planning to add more capacity. Maybe Southeast Asia government provide some incentive scheme or other reasons, but customers not only move out from the China side, but also expecting to add double capacity in the Southeast Asia. Yeah. This is possible to happen in the first half next year.
I see. Okay.
Please, one special highlight, we mostly deal with logic.
Okay.
Mostly deal with logic IC. We don't deal with memory.
Okay. You just mentioned that battery cell order in overseas market, is that the project made by overseas customers or made by Chinese customers, but they are relocating outside China into overseas factories?
No, overseas customers, not the Chinese makers.
Oh, okay.
China subsidy, I think the major impact is on battery cell industry particularly. The Euro markets continue to promoting the EV concept, so still have this kind of battery cell demand. Recent case, we mostly receive for next year is overseas foreign makers on foreign side.
Okay, I see. For next year, battery cell, based on your current visibility, many order on hand, next year's battery cells mostly are coming from overseas aspects.
Yes.
Okay. My last question for now is, as I remember, for 5G in China, you guys provide testers for EOL, right? That's mostly for the 5G infrastructure build. I'm just curious about it because right now we are seeing more smartphone OEM and some smartphone related supply chain are building out for next year's maybe potentially 5G enabled smartphones. I'm wondering because, based on my knowledge, you guys provided mostly to 5G infrastructure, but maybe next year and going forward, it's going to be more 5G smartphone end devices kind of CapEx spend. Do you guys also address in that?
I discussed this topic with another investors the other day. How to say? Actually, if you really want 5G smartphone, there's not really a difference. I mean, for optical fiber, there won't be infrastructure or phone. Eventually, if you refer to the Intel concept, optical fiber eventually will become not only for infrastructure, but door to door, and even on your PCB boards and devices. If you just talk about optical fiber applications, there's no limit. According to customers' plans, I think I mentioned before, customers' plans, if the demand this year versus last year, if you consider last year as one, this year it may double. Next year it may triple versus this year. If it's just the infrastructures, I don't think they probably will not mean that much.
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, I think Paul was mentioning something about the EV weakness. Is it something you have recently started to witness? Or maybe you can tell us a little bit more detail about it, and how it's impacting your ATS business?
Short term.
Well, short term, you will see that the Chinese government, they trying to restructuring the subsidy policies for the EV, especially for those EV manufacturing business all the way to the battery business. I think there's a restructuring for that business, but good or bad. Short term, I think that will be still affecting those investment on the CapEx spending for that industry.
When you say short term, does it mean that it should be finished sometime this year, or it could actually last into 2020?
Short term means you will see that the momentum for the investment for the EV industry in mainland China is getting weaker, at least from the third quarter all the way probably to next year. Again, long term, just like Jennifer mentioned, I think for the EV business, we still think that that will be like a trend for the energy saving industry. Just in China, I think it's pretty strong in the last few years due to the subsidy policy from the government. Right now, as long as the subsidy policy has been cut or restructuring, it will reduce that kind of investing momentum.
From a 2019 perspective, could you actually see decline on a year-on-year basis for ATS because this kind of weakness on EV?
First quarter is not much. I think first quarter thing is still the biggest contribution for our ATS to come from the EV market.
Thank you.
The fourth quarter, not really large decline, but we just foresee it could have some correction in the coming quarters. As you can notice a lot, yesterday's Delta guidance, I think that implies the same thing. As I say, the car market is very fragmented. I just say this could have some impact.
Okay. Do you think this will affect Sorry, did you just say you expect ATS to be down a lot in the fourth quarter? I'm sorry.
No, I said no. So far, we don't see a lot of decline.
It's rather stable versus Okay.
We're just expecting this could be. Because the battery cell in China becomes very conservative. Whether this battery cell market slowing down may be influence to downstream. We still need to keep eye on it. Currently, fourth quarter is not very big market change.
Okay. I see. Okay. That's clear. One more question about this MAS, because I understand this visibility is probably difficult to be come up at this point. I'd like to know at this point that on your accounts receivable, do you have any sizable exposure to this counterpart?
Okay. I received your question the other day regarding to AR and accounts receivable. After IFRS, there is a term which is that we define is, we do have a receipt in advance. Now the term has been changed to so-called contract liabilities. We do a little bit adjust to reflect our true AR turnover. Actually, that AR is not that big amount as you read from financial statements, because that is not taking out the dollar we have been collecting in advance.
Actually, our credit exposure is not as big as you state. We do some provision based on the accounting policy.
Okay.
Well, basically, I think for the residue or accounts receivable for the MAS, I think probably only 6% percentage of the sales revenue they made on the 2018. Approximately that will be somewhere like 10% for the warranty and the rest of the process.
I'm sorry, Paul, you mean like if this MAS revenue back in 2018 was about close to TWD 5 billion, so you say the account receivable equal to about 6% of that?
10% of that.
10% of that. Okay.
That's for warranty. Yeah. That's for the warranty for the shipments.
Okay. What CFO means, if you really want to talk about credit risk, and then you have to reverse, then that will be 10% warranty, which is according to contract, we only can collect one and a half years later.
Okay.
If these companies went bankrupt, and then the part we couldn't collect.
Okay. Thank you. That's clear.
Okay. Thank you.
Thank you.
The next question is coming from George Chang, Fubon. Go ahead, please.
Hi, Paul and Jennifer. Could you help us just try to picture the MAS business for the year 2020? What would 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 TWD 2 billion revenue contribution is more or less reasonable?
I think except for last year, last year was just a totally exceptional high for MAS. I think in the past, the average is always.
Further high
it's around between TWD 1 billion or TWD 2 billion. You want to project like a very conservative style with TWD 1 billion, that's quite reasonable. I think the key point here is MAS is a project-based company. Every year, project could be big, could be small, and our key to decide the size is collection.
Okay. Thank you.
Thank you.
Thank you.
Thank you. The next question is coming from Jerry Su, Credit Suisse. Go ahead, please.
Hi, Paul, Jennifer. Just two follow-up questions. One is that, I think I remember, you previously said that semi plus photonics, this segment of revenue could be going back to our 2017 level. I'm just wondering if this still holds after the third quarter results?
Possible.
Sorry?
Possible.
Possible.
Yes.
Possible will hold.
Should I confirm numbers? Should I give you
No. Anyway. Okay. That's fine. Another question is on the non-operating gains in the third quarter.
I think you have started to consolidate, well, not consolidate, start to book the contribution from Camtek. Could you quantify how much you have booked from Camtek in the third quarter?
Not yet. Camtek not yet goes to the book of Chroma yet.
Okay.
We still focus as the investment at the third quarter end.
Okay. Starting from 4Q, we could see some investment gain from Camtek as a possibility.
Yes, but minimum. Yes, but not that material.
Okay
based on top line expectation from them, which is somewhere around, I think $130 million, I think, to $150 million, somewhere like that, I think.
Okay. In third quarter.
That's the top line. Yeah.
Yeah. On third quarter, on non-operating side, what is the main contribution then?
Well, still coming from the consolidated group net income.
Okay. From the overseas-.
From the overseas operations.
Okay.
Yeah.
Got it.
From the 100% owned subsidiaries.
Okay. You have also mentioned that there will be some divestment of your buildings. Can you give more colors on that?
We already have buyers.
You mean the current existing headquarters?
I think for both current existing headquarter and also the newer A7.
Okay. I think we just finalized the contract with the outside contractors for the residential buildings. That will be somewhere like four years after. It's a long-term kind of a project. For the current headquarters, we already have potential buyers, and we signed a preliminary kind of NDA, I think two years ago. Expect this deal will be nailed down next year.
Okay. It will be more 2020 then.
Yeah. That will be 2020.
Okay. Got it. Thank you.
You're welcome. Thank you.
As a reminder, press 01 on your keypad if you would like to ask a question. We are now in question and answer session. Please press 01 on your telephone keypad if you would like to ask a question. There are currently no questions. I will hand it over to CFO, Paul Ying, for closing remarks. Mr. Ying, please proceed.
Thank you, Mark. I think for the third quarter, it's a pretty untraditional kind of third quarter compared to the past few years. Here we are still expecting that fourth quarter can give us some improvement on the top line and then give us a stronger second half of 2019. Let us can have at least match up with the sales revenue on the parent company compared to last year. Thanks for your attention and until next time, thank you. Bye-bye.
Thank you for your participation in Chroma's conference. There will be a webcast replay within an hour. Please visit www.chroma.com.tw/investor/index under the investor relations section. You may now disconnect. Goodbye.