Earnings Call: Q4 2018

Feb 13, 2019

Good afternoon, and welcome to DialED Incorporated 4th Quarter and Full Year 2018 Financial Results Conference Call. At this time, all participants are in a listen only mode. At the conclusion As a reminder, this conference call is being recorded today, Wednesday, February 13, 2019. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead. Good afternoon, and welcome to Diodes Fourth Quarter and Full Year 2018 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President and CEO Doctor. Keh Shew Lu, Chief Financial Officer, Rick White, Vice President of Worldwide Sales And Marketing And Le Yang And Director of Investor Relations, Laura Murl. Before I turn the call over to Doctor. Lu, I'd like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing the closing procedures and customary quarterly and year end review by the company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the company files its Form 10 K for the fiscal year 2018. In addition, management's prepared remarks contain forward looking statements, which are subject to risks and uncertainties, and management may make additional forward looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore, we refer you to more detailed discussion of the risks and uncertainties in the company's filings with the Securities And Exchange Commission, including Forms 10 K and 10 Q. In addition, any projections as to the company's future performance represent management's estimates as of today, February 13, 2019. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change, except to the extent required by applicable law. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information and gaps in non GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non GAAP items, which provide additional details. Also throughout the company's press release and management statements during this call, we refer to net income attributable common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes' website at www.diodes.com. And now, I'll turn the call over to Diodes' President and CEO, Doctor. Keshu Lu, Doctor. Lu, please go ahead. Thank you, Diane. Welcome everyone and thank you for joining us today. I'm pleased to report that 2018 represented the best performing year in Diodes history with the achievement of record financials, 15% organicrevenuegrowth driven by continued market share gains and a 75% increase in non GAAP profitability over the prior year. Our ongoing focus on the automotive and industrial sectors result in annual revenue growth from both target and market of 38% and 29% respectively and a combined 35% of total revenue. Additionally, our Pericom business excluding frequency control products grew 24% year over year to almost 10% of revenue primarily as a result of our increased content in high MPC, server, storage and the datacenter market. During 2018, we met significantly progress on Diodes' position as the key customers and the gaming shifts, not only within product line, but also across multi applications at the same customer. In fact, some of our largest customer installed content in nearly all products they offer. Which provide greater diversification for Diodes as well as a deeper relationship with those cousins. Our Piacom products has also provided us greater leverage, creating extensive opportunity in new and equipment and applications as well as additional cross selling opportunities for our other product offerings. More recently, I'm also pleased to have announced the proposed acquisition of Tesla Instrument Wafer Fabrication Facility and operation located in Greenham, Scotland or GFAB, This facility is about 320,000 square foot and has the potential monthly capacity of approximately 256,008 inches equipment diodes. Also as part of the traditions, Diodes and TI will enter into a multiyear wafer supply agreements. In Fitch. Diodes will continue to manufacture TS's analog products from GFAB. As TI transfers those products into it is other wafer fabs. This proposed acquisition are now well with our strategic plan for significant revenue and profit dollar growth over the next several years and office diode additional wafer fab capacity to support our product growth in particularly our automotive expansion initiatives. It also provides excellent engineering skill and a voice of that know how to support our technical and operational performance expectations. Further, the transition meets our material for strategic acquisitions. And we expect it to be immediately accretive. The closing of the transition is subject to customary closing conditions and is expected to be completed at the end of firstquarter of 2019. As we look forward to 2019, We expect to continue gaining market share and achieve growth rate that exceeding our served available market while prioritizing higher margin opportunity across Automobile, Industrial And Our Telecom product. Underpinning our anticipated growth and serving as a key theme for Diodes in the coming year. Are content gains across connected car, high end servers and storage. 5G and IoT. We are well positioned both operationally and financially to trust increasing profit and cash flow on incremental revenue growth and expect to once again reach new record across our business in 2019. With that, Let me now turn the call over to Rick to discuss our fourth quarter financial results and our first quarter 2019 guidance in more detail. Thanks Doctor. Lu and good afternoon everyone. As part of my financial review today, I will focus my comments on this sequential change for the fourth quarter as well as select full year results and would refer you to our press release for a more detailed review of our results as well as $14,400,000, a 2% decrease from the $320,900,000 in the third quarter 2018. This 2% sequential decrease is significantly below our normal seasonality. For the full year 2018, revenue was a record $1,200,000,000, an increase of 15.2% over $1,050,000,000 in 2017 and well over the growth of our served markets. Most profit for the fourth quarter was $114,200,000 or 36.3 percent of revenue compared to $115,200,000 or 35.9 percent of revenue in the third quarter of 2018. The sequential increase in gross margin was primarily due to improved product mix as well as the continued 8 inches ramp at our Shanghai fabrication facility SPAD II. For the full year, gross profit increased 22 percent to a record $435,300,000, or 35.9 percent of revenue as compared to $356,800,000 or 33.8 percent of revenue in the prior year. GAAP operating expenses for the fourth quarter 2018 were $70,300,000 or 22.4 percent of revenue. And $65,800,000 or 20.9 percent of revenue on a non GAAP basis, which is excludes $4,500,000 of amortization of acquisition related intangible asset expenses. This compares with GAAP operating expenses in the third quarter 2018 of $69,400,000 or 21.6 percent of revenue. And $65,000,000 or 20.3 percent of revenue on a non GAAP basis. Total other expenses amounted to approximately $1,000,000 for the quarter, including $2,300,000 of interest expense Income before taxes and non controlling interest in the fourth quarter of 2018 amounted to $42,800,000, compared to $44,400,000 in the quarter of 2018. Turning to income taxes. Our effective income tax rates for the fourth quarter full year 2018 were approximately 29.9% and 29.7% respectively. GAAP net income for the fourth quarter 2018 was $29,500,000 or $0.58 per diluted share compared to $30,900,000 or $0.61 per diluted share was 50,900,000 shares. GAAP for the full year was a record $104,000,000 or $2.04 per diluted share compared with a GAAP net loss for the full year 2017 of $1,800,000 or a loss of $0.04 per share, which included the impact of the 2017 tax reform. Fourth quarter 2018 non GAAP adjusted net income was $33,200,000 or $0.65 per diluted share. Which excluded net of tax $3,700,000 of non cash acquisition related intangible asset amortization costs, This compares to non GAAP adjusted net income of $34,500,000 or $0.68 per diluted share in the third quarter of 2018. Non GAAP adjusted net income for the full year 2018 increased 75% to a record $121,300,000 or $2.38 per diluted share compared to $69,100,000 or $1.37 per diluted share in 2017. We have included in our earnings release a reconciliation of GAAP net income to non GAAP adjusted net income, which provides additional details. EBITDA for or 22.4 percent of revenue compared with $72,000,000 or 22.4 percent of revenue in the third quarter 2018. For the full year 2018, EBITDA improved 55% to a record $261,100,000 or 21.5 percent of revenue compared with $168,200,000 or 16% of revenue in 2017. We have included in our earnings release a reconciliation of GAAP net income to EBITDA which provides additional details. Cash flow generated from operations was $61,600,000 for the fourth quarter 2018 and $185,600,000 for the full year. Free cash flow was $46,300,000 for the 4th quarter which included $15,300,000 of capital expenditures and $98,100,000 for the full year, which included $87,500,000 of capital expenditures. Net cash flow in the fourth quarter was a positive $90,700,000, including $47,400,000 of additional long term debt to fund a previously committed shareholder equity increase in the company's Chengdu corporate entity. Net cash flow for the full year was a positive $36,600,000 including the paydown of approximately $56,800,000 of long term debt. Turning to the balance sheet, $248,600,000. Working capital was $480,800,000 and long term debt, including the current portion was $213,800,000. At the end of the 4th quarter, inventory decreased approximately from the third quarter of 2018 to approximately $215,000,000. The decrease in inventory reflects a $2,800,000 decrease in finished goods, a $2,600,000 decrease in raw materials and a $1,700,000 increase in work in process. This is the 3rd consecutive quarter of finished goods inventory decreases reflecting our focus on reducing finished goods inventory. Vanish goods inventory days were 28 in the quarter compared to 30 in third quarter of 2018. Total inventory days were 100 in the quarter. Compared to $99,000,000 in third quarter 2018. Capital expenditures on a cash basis for the 4th quarter were $15,300,000 or 4.9 percent of revenue and $87,500,000 or 7.2 percent of revenue for the full year. We expect CapEx for the full year 2019 to remain within our target model of 5% to 9% of revenue. Now turning to our outlook. We expect revenue in the first quarter of 2019 to be approximately $302,000,000 plus or minus 2.5%. At the midpoint, this represents growth of 10% over the prior year period, and down approximately 4% sequentially, which is slightly better than typical seasonality. Expect GAAP gross margin to be 36 percent plusor-1 percent. Non GAAP operating expenses which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets are expected to be approximately 21.5 percent of revenue plus or minus 1%. We expect interest expense to be approximately $2,000,000. Our income tax rate is expected to be 20 are anticipated to be approximately $51,200,000. Please note that purchase accounting adjustments of $3,700,000 after tax for Pericom and previous acquisitions are not included in these non GAAP estimates. That said, I will now turn the call over to Emily Yang. Thank you, Rick, and good afternoon. Looking more closely at 4th quarter revenues, distributor POP was down by 6% in POS decreased 9.8% sequentially. But yes, POS was up 16% year over year. Outside of Asia, POS remained strong channel inventory increased 5.6 percent sequentially driven primarily by Asia region in preparation for the pre Chinese New Year Build as is typical at this time of year. Outside of Asia, channel inventory was flat. Looking at global sales in the fourth quarter, Asia represented 79% of the revenue, Europe 10% and North America 11%. In terms of our end markets, Industrial was once again our largest representative end market at 25% of revenue, consumer represented 24% communication 24, Computing 18 and Automotive 9% of revenue. Starting with the Automotive market, Growth continues to be strong, especially in Asia, with 2018 revenue increasing almost 38% over 2017, to 9% of total revenue. Biodes continued to secure new design wins across multiple products. Including MOSFET on the brushless DC motor, electric power steering, water pumps, power windows, electric horn, infotainment, battery management and advanced driver assistance. In addition, USB power deliveries being added to automobiles, which is driving design ins of our solution in infotainment and mobile wire and wireless charging applications. Additionally, our diodes and rectifier product has seen solid momentum in the automotive space, driven by the need for our robust electric discharge protection in the connected cars. We also saw strong demand for daytime running lights and body control modules as we continue to introduce new products like bipolar junction transistors and LED linear controllers. In the industrial market, we also achieved strong full year growth of more than 29% accounting to approximately 25 percent of total revenue. During the quarter, we secured multiple new design wins for our normal density trench MOSFET technology, data line platform, top sensors, ShopKey, SDR, and BJT products for our broad range of applications, including brushless DC motors, LED lighting, DC fan, power tools and E lock applications. We also continue of high speed interfaces across multiple end applications in the IoT industry. EFC protection is becoming more important for this data links Diodes SDR and Shopee product remains strong in the DC fan and lighting market where we offer products suitable for high temperature environments. We also saw strong momentum for our recently introduced Gate Drivers designed into battery test systems regulators into DC fans as well as transistors and synchronize controllers into power applications. In our consumer end market, 2018 revenue grew 10% over 2017 as we continue to achieve strong momentum as across a wide variety of applications such as low power USB Type C charging and power delivery wireless power charging, augmented reality, panels, earphones, wearable, portable devices, OLED displays, smart speakers, gaming, Bluetooth as well as WiFi trackers. In addition, USB Type C is gaining market traction and expanding its footprint to new end products such as 3rd cycle boxes as well as Type C adapters to convert the Type C back to Type A for the existing installed base. Our wide signal switching and max portfolio covers all this applications need. Additionally, our audio products are achieving significant revenue increases, driven by the high demand for our audio alarming features in the Bluetooth and WiFi tracker applications. We also secured key design wins for our gate drivers and synchronous controllers for home appliance applications such as air conditioners, fans and refrigerators. In communications, Bio has been actively engaged in this market with our comprehensive small footprint, DSM and CSP MOSFET portfolio, and have been achieving design wins and revenue growth. We also continue to expand our portfolio of battery protection mock sets to address this market and also see strong demand for LDOs and hall sensors in smartphones to help reduce pilot consumption and increasing battery life. Our design win activity also continued for ACDC charging solutions for smartphones charges and adapters. Also within communications, Mega Data Center Application are driving the 100 gig and 400 gig optical transceiver market to address the bandwidth needs of data communications High speed transceivers require high performance and low jitter oscillators as our timing reference. Diodes' broad portfolio of small form factor ultra low jitter exo products position us well in this growing market. Further, we continue to see strong demand for our EP signal switches along with strong demand for applications for ultrafast recovery rectifier in the low profile package in the mobile phones, base stations, wireless charging applications. Also within communication, we're also seeing very strong design win activities in 5G applications with a wide range of Pericom products including PCIV packet switches, clock IC, crystal and crystal operators lesser shifters and high speed muxes and with Diodes products including low noise LDOs, bus converters and MOSFETs. 5G is only in the beginning stage of the infrastructure build out. And as Doctor. Lu mentioned, We see this In computing, during the quarter, we secured new design wins for PCI regen 4 products from the Pericom product line, including single market redrivers and active mocks in the gaming and server applications. We also saw significant opportunities for USB type and USB 3.1 ReDrivers in tablet and PC applications. In fact, USB Type C connectors continue to gain market traction as new applications are adopting USB Type C connector options. For example, the latest stocking stations for commercial notebooks supporting USB Type C would require USB and display 4 signal boxes. Diodesolutions supporting USB Type C Alternative more for signal switching and signal integrity continue to expand our designing activity in tablet, notebook and docking station applications. Heart sensor are also gaining traction in the notebook and tablet applications by reducing power consumption, while maintaining reliable performance. Additionally, our broad portfolio of Shopee Retifier Technology continues to win design ins in applications such as USB power delivery and ATF power supply. In summary, we are very pleased with achievement of record annual results across our business driven by our past design win momentum, expanded product offerings and increased market share and content at customers. Additionally, our continued focus on Automotive Industrial and our Pericom products has further contributed to our growth. While also offering additional higher margin opportunities across a wide variety of applications. We expect this strategy will continue driving profitability growth and cash flow for Diodes in the years to come. With that, we now open the floor you. Our first question comes from the line of Gary Mobley of Benchmark. Your line is open. Good afternoon, everybody. Thanks for taking my question. I want to start with a question or clarification for you, Rick, you mentioned in your prepared remarks, Q1 revenue guidance of $302,000,000 in your press release, it reads 3 $1,000,000. So I'm just hoping to pinpoint exactly what it is. Well, it's 302 302, okay. So, still prompts my second question, down 4% sequentially. Is, better than seasonal. Nobody in the industry is doing better than seasonal in the first quarter. So why go on a limb with that sort of guidance and if it's truly backed by demand indicators and whatnot, could you give a sense of how you guys are faring so much better than the industry right now? Okay. I think we always talking about the seasonality somewhere around 9 down 5% to 10%. But similar to last year, we do see a very strong demand for our product. Especially the winning from content increase. I think during the speech, you can see we are gaining more shares, not just a more new product, but we do actually gain more shares from the content increase. So even when we see some of the application to slow down, in 1Q but due to the content increase, our effect by seasonality reduced. Okay, I did have a follow-up question about your Gfab acquisition. So obviously, it doesn't perhaps doesn't do it with TI strategy and perhaps it's the reason they're willing to sell it. So I'm just wondering what the arbitrage judges that you're betting on here. What don't they see in this facility that is, going to benefit you strategically or financially? Well, I don't want to speak for them, but obviously they are expanding their 12 inches fab and they are moving to the small geometry. For Diodes since we are we do have a need for more capacity for 6 inches but especially we really don't have enough capacity for our 8 inches 8 inches products. So this is just the right match between the two companies when we move the product portfolio into the 8 inches it really suit us from the usage point of view. I think during the speech, you can see we do building significant revenue and profit GP data increase in the futures in this fab will be able to provide us the peoples, the skill, the capacity, and also it's going to be very positive either to Diodes operations. Okay, that's helpful. Thank you, everyone. Thank you. Our next question comes from Sean Harrison of Longbow Research. Your line is open. Hi, everybody. Congratulations on the strong results and guidance. Doctor. Lou, it didn't say in the press release for the TI facility that you're acquiring the purchase price. Is that something you can provide to us. I'm just trying to figure out that you pay a lot to get the accretion. I know you usually like a bargain. Number 1, we do have agreement with PI. The detail of the purchasing cannot be disclosed, okay. So but the but two things I do can add to can tell you. One is it meet my M and A criteria Remember, one of the key M and A criteria is need to be accretive within 1 year. And fortunately, this acquisition, it provides immediately a cushion and acquisitions. So now that's what I really pay attention. Number 2, you know, number 2, we always say this is in significant on the material. Yes. It's immaterial. In material. So from both TI and diodes perspective, we're classifying this as immaterial. And therefore, the contracts and the details of the negotiation will not be disclosed. Got you. That's helpful enough. On your current 8 inches capacity, the at the Fab 2, where are you at right now in terms of production versus kind of I know that the target level is what 12,000 wafers a month or something like that? Yes, if you remember, start from beginning of last year or actually we start working on 8 inches capacity in SFECT II since 2017, the first production is in March of 2018 and we are able to ramp it up to you know about 9000 wafer a month by December 2018 and we were hoping we start to continue to ramp it the maximum capacity in SFAB2 is only 12,000 a month 8 inches capacity. And so when we're talking about this, you know, this is 8 inches capacity and is for most fab for SBR. So typically somewhere around, you know, the probably 5, 6 dayers, per wafers, okay? So, 256,000 wafer, 8 inches equipment wafer, layers, layers. Yeah, it's a good addition to our discrete, especially most fab and and SBR's capacity increase. So in fourth quarter, the goal is to get to between 80009000 and that's actually where we got to in SFAB2. Okay. And then how quickly will you be able to port your customer base into that fab and have it side? Is it within the first half of this calendar year? No, no way. First, we need to develop the process, which may not be taking that long, but if you remember on our SFET 2, we actually take 1 whole year of 2017 to moved in the equipment, repair the process and fortunately on this site equipments already there and we probably need like 6 months to implement the process Then it probably take another 3 months to do qualification, to do this one and so we'll put it up the product notice to the customer and they say Probably, currently I expect maybe end of the year, we will start to notify our customer, give them the sample, but to visually rent the customer need approval and all this one. So it probably take a while. That's why it's important for us to continue supporting TI's need and keep the fab loaded, okay? Then the time frame TI demand go down our demand will go up and it's able to give us accretive immediately and continue. Right. So for the customer qualification, it really depends. I would say range probably from 1 quarter to 3 to 4. It depends on the So it's going to take some time. Yeah. And especially in this fab, we expect to support automotive and industrial and the design or the ramp for our of the acceptance for the customer to agree to convert, it take a while. Yeah. Okay. And some of the automotive require 1 year or 1 and half year. And so it's really a very critical for us to be able to continue to support TI while we take the time to rank in our product, so we don't want to run into a problem of the capacity is empty or capacity is wasting. Got you. Thanks so much. Thank you. Thank you. Thank you. Our next question comes from Tristan Yara of Baird. Your line is open. Hi, good afternoon. Follow-up question on this fab from TI. What's the margin profile for the foundry that you're offering to them, is that below corporate average? No, I cannot. Like I said, we cannot disclose and that we have agreement with TI, the detail of the operation cannot describes, but I'm going to emphasize one more time. It's accretive immediately. Okay. Okay. And then once you get full access to that fab, presumably in a few years. What percentage increase does that bring relative to your current total production today, how much incremental capacity percentage wise is this fab going to give you once you have full access in a few years? This I cannot like I said, I cannot really give too much of detail, but I can tell you now today the 8 inches is almost fully loaded okay. And some of the 6 inches, it probably is not fully loaded. But the key thing is we do not have with the agreement we are able to accretive immediately. Therefore, any additional will be the gain. Any additional loading from Diodes will be the gain. Now I probably cannot tell you how much again because then we disclose too much of the detail but dolding from Diodes will be able to shell more profit, that's for sure, right? Yes. So Tristan, one thing we can disclose and that GFAB currently has over 8000 wafers per month of 8 inches capacity, plus approximately 13,000 wafers per month of 6 inches capacity. And if you go through that whole process, that's what we put in the the press release, which that the total capacity is approximately 256,008 inches equivalent layers per month. Okay. And I wanted to mention, when we talk about 8000 wafer, that use a traditional see most wafer like 20 days. But for Diodes product especially for most fab and for the for the SBR is not the same number of layers. That's that's why instead of using wafer, 8000 wafer are using total 260 dayers a month. And the reason is the product is different and typically CMOS LR product number there is much higher. You know in average, probably 18 to 20 there and our discrete which is much, much less. And that's why I eat your way to use is using the data. Okay. That's useful. And then a quick follow-up, on the earlier question, Is it too early or are you able to see, initial order activity now that the Chinese New Year is over? And specifically, what type of backend capacity do you have? Last year, you had more labor coming back from the Chinese New Year that you expected and therefore you had probably a little bit more capacity than you expected. How is that shaping up relative to demand, you know, basically starting this week with post Chinese New Year? Okay. Tristan, you can see we give the guidance today that in the Chinese New Year actually just over a couple of days ago. And so we do already know how many people come back within the Chinese which means last week the Chinese New Year is last week. And New Year is already over Sunday, that's that Sundays. So, we give the guidance and that guidance is already in consideration of the capacity, the supporting. And so I think that guidance reflects the people performance and the people return from the Chinese New Year, my point is is not going to be a big surprise anymore. Thank Our next question comes from the line of Ed Giroche of Sidoti. Your line is open. Yes, congratulations on finishing up a terrific year. Well, this is great. And I wanted to ask you bit on the automotive side. Certainly, some premium growth being seen in newer systems, whether it's ADAS or connected driving applications I would assume that more traditional automotive systems like power steering, windows and the like would be a good bit slower, but could you just speak about how the growth trended throughout 2018 and what you're seeing going into the first quarter Right. So this is Emily. Maybe let me address the question, right? So even with some of the traditional applications that you mentioned, like power steering, the windows and stuff like that. We also see a lot of change over there, implemented brushless DC motor. And with this change that which we've been emphasizing for the last few quarters, we start seeing a lot of, content improvement especially on the diode side. So that's really what we're seeing. So not switching from the traditional to the newer models even is the same function, but it really enriched a lot of features and functionality kind of really helping the content expansion that we've been talking out. Okay, terrific. Thanks for that. And then Doctor. Lou, just as you continue to mix up in the more complex devices, do you see that 7% R and D budget being adequate, let's say, a couple of years into the future? Or would we expect that to maybe grow a little faster than revenue at some point You remember when I go to talking about 2025, we're hoping all driving the GP up to 40% very new 2,500,000,000. You remember that is the thing we're talking about. They are in that same. I do intend to increase our model of R&D to 6%. And you probably say, 1% more, but don't forget, 1% is the 20% of the total R and D numbers, okay? And number 2, number 2 is, you know, we have the growth on both R and D on both discrete and analog. So, discrete, the R and D will keep the same as the revenue growth. And so therefore, I don't see a need of significant increase our R and D from our business model. And I think 6%. 7%. 7%. So, 7%. Yeah, from 5% to 7%. So, it's is a good increase. And I think that the key thing really is efficiency. Of the using the R and D money, okay? And do, you know, I've been driving how to more effectively to use in R&D Money. And so far Diodes is able to efficiently increase our efficiency control or using our R and NIM and And I want to tell you that we purchased PELCOME and PELCOME product, the IC product is in the 20 in 50%, 60% GP. And if you look at PELCOM, you know, I'm talking about the ICPs and PELCOM IC, not including frequency control product. And in every speech, you already know our telecom actually grew 24% of the IC Telecom IC increased 24% last year. So, we are not increasing the R and D money. We keep about the same And you can see that even with that, we are able to grow 24% last year. So to answer your question, I think we are very well to utilize our R and D money. Thank you for that. And then one last one. I understand that the additional Chengdu investment was kind of prescribed in the agreement is it geared towards eventual expansion of any kind or is it just, change in equity? Ownership structure. You're talking about the Chengdu Equity investment that we talked about in the fourth quarter? Yes. What's that going to be spent on in the future? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Okay. Is that we do the mode we are to two items. 1 is a constantly CapEx increase to support our need for the capacity expansion. Now we'll still continue that another big money is the building. If you remember at the beginning when we build Chengdu phase 1, we build up 1 manufacturing building 1 R and D building and 1,000,000,000. And we kind of using up all the majority of our manufacturing building. So, we do plan to go to next phase which is building another Five floor of the manufacturing floor. And that is the one going to consume a big money. And I'm just, you know, think try to see we can fully order our space and see you know did they a little bit on our building expansions. So it's still ongoing and when we have a need, we'll start to building up the next manufacturing building. Thanks. Thank you. Thank you. At this time, I'd like to turn the call over to Doctor. Lu for any closing remarks. Doctor. Lu? Thank you for your participation on today's call. We're looking forward to providing another update on our business next quarter. Operator, you may now disconnect. You, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.