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TECO Electric Machinery Co Ltd
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Ladies and gentlemen, good afternoon. Welcome to TECO Electric & Machinery 2023 First Quarter Earnings Conference. I'm Andy Chien, TECO's spokesperson.
Before the meeting starts, I'd like to introduce our executives attending the conference today. First of all, Chairman, Sophia Chiu; President, Thomas Fann; and An-bing Liu, Director of Corporate Administration Performance Development Office.
In today's meeting, I'll first go over TECO's Q1 results, then President, Thomas Fann will talk about the performance of our 3 main major business groups and provide a recap of our recent major events. After the presentation, Chairman Chiu will host the Q&A session. The presentation materials have been uploaded to the MPLS site and the IR section of TECO's website. You may go there and download the materials now.
Now I'd like to go over our Q1 results. Net sales in Q1 came in at TWD 14.9 billion, down slightly by 1% Q-o-Q, but up 7.2% Y-o-Y, mainly thanks to continuous growth of Green Mechatronic Solution in North America and Europe, as well as engineering projects of Intelligence Energy.
Gross margin was 24.3%, up 1.3% Q-o-Q and up 2.4% Y-o-Y, mainly thanks to the price increase of our motor products and the dollar's appreciation. In Q1, OP margin was 11.4%, up 2.6% Q-o-Q and up 3.1% Y-o-Y, thanks to the higher gross margin and expense control efforts. EPS was TWD 0.78, up significantly Y-o-Y.
Next slide, OP revenue and gross margin. Our gross margin has been on an upward trend in the past few quarters, sitting at 24.3% now, due to the reasons that I shared with you earlier, compared with the past few quarters, OP margin also increased visibly.
Next, I'll hand over to President Fann, who will talk about the performance of the 3 major business groups.
Ladies and gentlemen, good afternoon. I'm Thomas Fann. I'd like to go over the performance of our 3 business groups.
You can see on the slide that in the first quarter, Green Mechatronic Solutions sustained its growth posting solid performance. Intelligence Energy benefited from the growth of large engineering projects, including wind power and energy storage system projects, thus posted higher-than-expected Y-o-Y growth.
Air and Intelligent Life mainly consists of AC, home appliance and logistics business segments, in the same period last year, the revenues surged due to the government's AC for every classroom project. Excluding the one-off project contributions Air and Intelligent Life Q1 revenue would have split Y-o-Y slightly amid weaker macro conditions in Taiwan, which resulted in less than expected home appliance and logistics revenues.
But I'll go over later, on our efforts to pursue transformation for our AC business, placing more focus on the commercial AC segment. In terms of quarterly comparisons, Green Mechatronic Solutions posted sequential growth, despite the weak conditions in Taiwan and uncertainties in Mainland China. The growth momentum in the U.S. helped support the upward trend.
In terms of Intelligence Energy, with several large projects entering the execution phase this year, revenue contribution will likely be sustained. Air and Intelligent Life split Y-o-Y. But Q-o-Q wise, it has rebounded since Q4 last year. It still delivers healthy performance despite unfavorable economic conditions in Taiwan.
Revenue breakdown of business groups. If we compare Q1 this year to Q1 last year, you will see bigger changes. Green Mechatronic Solution contribution is maintained at 52% to 54%. Intelligence Energy share increased from 11.7% to 20.2% this year in Q1, and its percentage is likely to continue to expand on the back of new projects.
Projects initiated in the past few years will enter execution phase this year, helping to boost the segment's revenue share. A few highlights we would like to share with you due to rising energy prices and emission reduction requirements around the world. We launched the energy saving solution 2 years ago, and we have started to make bigger breakthroughs starting from last year. We also expect to see stronger growth this year. And we are doing this in Taiwan. And in addition to Southeast Asia, Mainland China, we are able to lend many deals.
For this segment of business, we offer systems, not just stand-alone products. In addition, we are also offering consulting services, helping lenders to improve their systems and their solutions. The revenue in 2023 is expected to reach TWD 6 billion. Moreover in North America, the American Job Plan, Ship Act and RA Act are actually related to energy profiles from energy efficiency improvements through energy transition or new energy development.
These areas happen to be very relevant to many of our product lines, helping us to post strong performance. This is the same case in Canada. In Q1, North America contributed to more than 30% of Green Mechatronic Solutions revenue, accounting for 31.2%, and the percentage is projected to increase continuously. North America is projected to see faster growth than other regions.
For Intelligence Energy, I'm very happy to report that we have landed a big project, it is a 500-megawatt onshore substation EPC project of offshore wind farm valued at TWD 5 billion. Currently, our orders in hand for engineering and equipment exceeded TWD 25 billion combined in value. So this is a very healthy trend will likely help us to support faster growth of the Intelligence Energy business group.
In terms of Air and Intelligent Life, as I have indicated, a big first [ boughters ] that we have been pursuing transformation for our Intelligence AC business. We are placing more focus on commercial AC with big revenue growth in Q1 at more than 46%. So the revenue of commercial AC in Q1 increased by more than 46% Y-o-Y. And the share of the commercial AC business has increased from 18.6% to 26%. We project this percentage will continue to increase. Given the strong outlook for AC -- commercial AC growth trend in the second half of this year.
As for the second quarter or even the third quarter, we have to be more prudent and cautious because in Taiwan or Mainland China export performance has been somewhat suppressed. Last month, China's manufacturing PMI fell below to 50. Although business activities seemed very active during the May 1 Golden Week. Per capita spending was less than expected. This cast uncertainty over the country's recovering outlook.
As for Taiwan, due to the subdued export conditions, the impact on our customers' industries have been held -- felt. So in Taiwan, we have to be more prudent. The lower -- the low-voltage products have taken a bigger hit as for high-voltage products such as high-voltage large motors such as the high-voltage products in North America continue to enjoy very healthy order momentum. Including in Taiwan and Mainland China, we are also receiving orders at a very nice pace. So this business will likely sustain our business growth for the Green Mechatronic Solution this year.
As for the second quarter, Green Mechatronic Solution will likely post Y-o-Y growth and Q-on-Q growth in Q2. As for Intelligence Energy, as many projects are going to enter execution phase this year, this segment is likely to post Q-o-Q and Y-o-Y growth. Air and Intelligent Life is expected to be down slightly Y-o-Y due to the unfavorable macro conditions for home appliance and logistics business, but it is expected to see Q-on-Q growth. As I have reported to you, its Q1 performance was better than that of Q4. And with sequential growth likely in Q2.
Therefore, company-wide gross margin is expected to maintain Y-o-Y growth. Q-o-Q wise, however, we expect to see more flattish growth Q-o-Q with subdue changes Q-o-Q -- Q4 gross margin, we have improved a lot from gross margin averaging 21% last year. So as we enter Q2, we expect to see somewhat flattish growth from Q1.
I would also like to share with you some highlights that we have made. In the end of March, we participated in the Smart City Summit & Expo and the sustainable City Expo held by the National Development Council. And these shows, we demonstrated our energy saving and ESG-Ready platform.
These solutions help enterprises to perform carbon inventory chicks and perform monitoring and management of the carbon emissions reduction efforts. Besides, we also demonstrated our green transportation solutions. In addition to e-bus, Smart Logistics is also a very important pillar of our business, and we have received good responses from visitors at the shows. And we believe this business will likely sustain our growth going forward.
Moreover, in the EV mobility show in Mid-April, TECO build Taiwan's first SiC high efficiency drive, which features a SiC modular-direct drive. SiC is very, very powerful. It helps to reduce the size of products, while also enabling higher power efficiency. So this is a product that we've launched here in Taiwan.
Moreover, we're proud to announce that in the latest MSCI ESG evaluation, TECO has been granted the AA rating, up from the A rating. This placed us on top -- on the top 15% list among global peers. We owe this achievement to our employees who have made relentless efforts under Chairman Chiu's leadership. So we are able to obtain the recognition from the Research Institute. Thank you very much.
Thank you, Thomas Fann, for your presentation. We have concluded our presentation section. Now I would like to proceed with the questions and answers.
This is Daniel from Vinda Securities. What is your BB ratio up until now this year?
For our high-voltage products, the BB ratio is larger than 1. With the outlook looking very good right now. Our Intelligence Energy segment order backlog is valued at more than TWD 20 billion at the moment. According to our order volume in the first quarter, BB ratio ranges between 1.3 to 1.5. As for other products, we don't think that those are worth referencing because things like low-voltage products or our home appliance products, they are direct sales driven. This means the orders may come in this month, but we will have to ship the products next month. And they are not good indicators for long-term performance.
Okay. May I have a follow-up? Since that you have a more conservative outlook for your low-voltage products this year. But if we look at your Q1 performance, what is the ratio, the shipment ratio of your low-voltage and high-voltage motors?
Given the larger low-voltage market, currently the shipment ratio of low-voltage to high-voltages is approximately 2 to 1.
We raised the product prices due to raw material price hikes earlier. But in the first half of this year, raw material prices trended lower, such as copper. So will you lower the product prices? Or will you keep the prices unchanged given the better demand for your high-voltage products?
Pricing adjustment decisions are made based on market competition scenarios. In the beginning of this year, raw material prices have actually surged quite significantly, and they have come down a little bit recently. It is very difficult for us to tell how the prices are going to change this year.
We will have to wait for the prices to be more stable to really decide whether the impact is going to be positive or negative. But according to the market conditions, we don't see any major moves from our large arrivals at the moment.
Currently, everyone is holding their ground. So TECO will not take the initiative to lower our product prices. But what we may do is that we may make some reactive price adjustments based on the moves of our customers or certain competitors in certain markets.
This will allow us to win orders more flexibly. And basically, the selling prices will mostly stay unchanged throughout this year for most of our products.
I'm Suji from Fubon Securities. What is your CapEx this year and next year? And what is your progress with your fab construction in Mexico and India?
Our CapEx this year will likely be -- will likely not change much this year. The larger spending items are factory construction, including in Mexico and India. For these sites, they have dedicated functions, focusing more on final assembly and testing.
Basically, starting from the Vietnam factory, we've been working on modularizing our production sites. For each overseas site, initially, we invest about USD 10 million. As for other larger spending items, they include solar PV energy production and energy storage-related projects, which will be made incrementally, so we will not expect to add much CapEx to our current budget.
Thomas Hank from China Life. In Q2, your revenue grew Q-o-Q, but you delivered a flattish margin growth. Was it caused by your ForEx fluctuations or the bigger contribution from Intelligence Energy?
Actually, after the price hikes, ForEx fluctuations did not change drastically. So the margin will be flattish without bigger changes to our product segments. The margin of Intelligence Energy's projects may be lower, but we've seen visible growth in the margin of Air and in Intelligent Life given its strategic transformation.
In terms of our revenue breakdown in Q2, Intelligence Energy did not see big share changes. So the impact was actually smaller than you would expect. In terms of the program mix of the Intelligence Energy. This year, we have been implementing price hikes for new orders or our -- and our selling prices. So we expect the product price margin will likely to increase going forward.
We guided the Q2 gross margin based on a more conservative outlook. Considering the product mix we have as well as our consistent profitability, we expect our gross margin to be quite solid.
May I have a follow-up? Which IgMs are you engaging for your SiC drive? You are working on your e-bus shipments, mainly in the domestic market. When are you going to export these products?
With the SiC, we just made the announcement here. And going forward, we are going to conduct testing with carmakers. Initially, we will be working with the 2 largest Taiwanese bus makers. And the product will not be used only in making e-buses, but also in heavy-duty commercial vehicles.
Currently, we are also working to reach out to overseas product -- overseas customers, especially in the commercial segment. So in terms of buses or commercial vehicles, we are also reaching out to carmakers to promote this new product.
You mentioned in your slide -- in your presentation that the labor shortage has been alleviated somewhat. How did you achieve that? What was the impact on your revenue?
The labor shortage happened because of the fact that we had many cases here in Taiwan, and everybody was working to attract labors. At the same time, due to the COVID-19 pandemic, we weren't able to bring in labors from other markets. So relatively speaking, our projects are being conducted on schedule and according to normal progress.
And at the same time, we get to choose labors from other projects that were released by other companies, which is actually beneficial to TECO.
I'm [ Suji ] from Fubon Securities. You mentioned earlier that the value of your Intelligence Energy order in hand is approximately TWD 25 billion. What are the contributions of your EPC projects and products? Also, how is the e-powertrain, order volume in hand that you have at the moment? And what is the order volume in North America for your electrification projects?
Of the TWD 25 billion order value, most of them are projects with the products already included. As for e-powertrain, the revenue will likely be 3x more or even more than 3x than last year. We are working to secure more opportunities and this business is quite special. It is different from motors because as you enter the supply chain of carmakers, you will expect to secure more orders in the future.
As for electrification, actually, it covers a lot of business areas, including motors. But if you're talking about E-Skid, we expect to clinch 30 to 40 deals this year. And in Q1, the order streams came in quite normally.
Could I have a follow-up? When do you expect to start mass production or shipments from your Mexico and India factories?
Currently, we are very happy with the progress we've made in Mexico, and we expect to start production rather we -- we expect to start mass reduction in the end of Q3 or in the beginning of Q4. As for the India site, we hope that we will start mass production in Q3.
We see Mexican site on U.S. Mexican border. It is Montreal about 600 kilometers from our Texas site and 200 kilometers to the border.
I'm [ Juan Bore ] from KGI Securities. Earlier, you had chip shortage problems with your E-Skid. And you said that you expect to clinch 30 to 40 deals this year. Have you already taken into consideration the related implications? And have you experienced relief in the raw material shortage?
Yes, there has been some improvements with material shortage. And we have already factored into our order projections volume.
I'm Chung Yuh Ang from Eastspring Investments. Recently, Thai Power Company announced that they would stop doing out certificates for new energy storage case fields. Will that affect your development in the energy storage field? What was the revenue share of energy storage?
Because TECO's partners are legitimate vendors, Thai Power's decision will not affect their operations nor our performance this or next year.
I'm Hank from Chinalife. Your Air and Intelligent Life's OPM fell to 2 percentage plus. How do you intend to improve that?
The OPM number is consolidated result. In terms of home appliance, after the product mix change, the gross margin already improved with improving OPM as well. As for other components in the consolidated results, the weaker performance of the investees in China and logistics business in Taiwan affected the OPM.
But in terms of home appliance segment, we mainly focus on residential AC excluding some products that are not profitable, although we would still have a slight in revenue, profit actually increased.
What is your order visibility for the Green Mechatronic Solution and Air and Intelligent Life?
For the high-voltage products, the visibility is as long as about half a year, and we continue to see sequential growth monthly for our order volume. But in terms of low-voltage products, older lead time is only 1 month. So the impact on order volume is bigger.
I'm Daniel from Vinda Securities. In previous investor conferences, you generally provide guidance for your next quarter's margin range. Could you tell us why you didn't do so this quarter?
This was because of the current restrictions of the stock exchange. Providing a margin range will be regarded as providing financial guidance projections. Because we didn't announce our financial projection, if we do so, it would be front upon. This is why we presented our projections in this way today.
For your TWD 5.5 billion onshore substation project, when would you start the execution?
Because that is the first phase for a 3-phase project, the project will be started after 2024.
You projected your Q2 gross margin to be flattish from Q1. Could we perhaps take the 24.3% you provided at your full year guidance?
Actually, we think we will probably be better than that afterwards. But there are still many uncertainties currently. We provided more conservative projections.
Could you perhaps provide some outlook for next year?
Of course, our company would set our 3-year plans, and they tend to be more aggressive. 2 years ago, when our Board of Directors made our decisions to increase our revenue by TWD 20 billion in 3 years. We have been working on making that plan happening step by step. Actually, based on our industry dynamics, 90% of the deals that we have secured have already been affirmed this year. And orders coming in after that will determine our performance next year.
However, based on the current market conditions and the business opportunities, we think that we still have to be prudently positive for the performance next year, unless there are major changes in the market.
Your long-term borrowings increased by TWD 800 million to TWD 900 million. Was it because of increased CapEx or other purposes? And also your debt ratio continued to drop over the past 4 years. Do you have a long-term or midterm target? Moreover, do you have any adjustments, any plans in response to interest rate hikes?
Our long-term borrowings increased in Q1 due to 2 reasons. Firstly, the completion of the Taipei Bioinnovation Park. Because of it, we have to invest in more operating expenses.
The other reason is due to our investments in solar PV farms. In Q1, we acquired Taipeng Energy, so we had to consolidate its balance sheet into our consolidated reports. Moreover, we need to invest -- we needed to invest in new case fields, so we need to borrow more. However, overall, the borrowing amount should be down sequentially.
What is your expected rent revenue from the Bioinnovation Park?
The building itself is about TWD 5 billion plus and 20,000 of that building is available for sale. We expect to generate about TWD 400 million or more in rent revenue, although the amount is relatively small to TECO, but it's a stable revenue stream.
Since we don't have any questions from the floor, this concludes our investor conference for the first quarter. If you have any other questions, please feel free to contact us at the IR Department of TECO. Thank you very much for your participation.