Yageo Corp

TWSE:2327

Earnings Call Analysis

Positive Q2 Performance with Continued Momentum

In the second quarter, the company outperformed expectations with a revenue of TWD 31.4 billion, marking a 10.2% increase sequentially, driven by strong AI and consumer product sales. Gross margin rose to 35.1%, the highest in two years. Operating expenses were well-controlled, improving the operating margin to over 20%. Net income reached TWD 5.5 billion, and EBITDA grew to TWD 8.6 billion. For the third quarter, single-digit revenue growth is anticipated, with consistent demand from the AI, consumer, and computing segments benefiting overall margins.

Strong Quarterly Performance Overview

In the second quarter, Yageo outperformed its own guidance by reporting TWD 31.4 billion in sales, reflecting a 10.2% sequential growth. Gross margin improved to 35.1%, marking the first time in two years reaching this level. The positive momentum was driven by strong AI-related sales and consumer products. The company's effective cost control strategy led to operating expenses being reduced to TWD 4.5 billion from TWD 4.6 billion in the previous quarter. Operating margin thus improved to over 20%, reaching TWD 6.5 billion.

Year-over-Year and First Half Comparisons

When comparing year-over-year, sales showed a robust 17.4% growth in the second quarter. The first half of the year saw a 13.4% increase in sales, totaling nearly TWD 60 billion. Gross margin also showed a positive trend, rising from 33.1% in the first half of the previous year to 34.5% this year. Operating profit improved slightly to 19.1% from 19% year-over-year, and net income rose from TWD 7.8 billion to just over TWD 10 billion. EBITDA margins held steady at 26.6%, with EBITDA dollars amounting to TWD 15.9 billion.

Sales Mix and Regional Insights

In terms of product mix, the company experienced a minor slowdown in the MLCC segment influenced by softer industrial applications and a flattening auto sector. Sequentially, tantalum products showed a 2% improvement. Regionally, Europe saw a decline by 3% while the US and China markets picked up. The company's cash level increased to TWD 92 billion, and they reported a better cash conversion cycle with receivables at TWD 23.6 billion and payables at TWD 14.8 billion.

Third Quarter and Full-Year Guidance

Despite a strong performance in Q2, Yageo's guidance for Q3 is moderately optimistic with low single-digit growth expectations. The gross margin is projected to improve by a low single-digit percentage as well. The positive momentum from AI-driven applications and consumer-related products is expected to continue, though the company does not foresee a sharp increase, rather a gradual and modest demand improvement.

Utilization Rates and Inventory Management

Yageo plans to increase the utilization rates for commodity products from 55% to 65% and for premium products from 70% to 75%. Inventory levels have been managed to align closely with market demand, reducing turnover days from 130 to approximately 120. The balance sheet shows improvements in liquidity and gearing, with net debt to equity improving to 16.7%.

Sector-Specific Performance

The company saw better-than-expected performance in tantalum capacitors, particularly in the PC and automotive segments. Demand for notebooks, SSDs, and servers drove this growth, and bookings remain positive with growing backlogs. However, the industrial sector remains weak, mainly influenced by European markets. Automotive is dynamic, bolstered by electrification trends despite some postponed projects.

Operational Expense Management

Yageo has managed operational expenses effectively, achieving a 14.5% OpEx ratio. The company plans to maintain this trend of gradual improvement. Distribution costs, tightly linked to revenue, account for about 2-3% of OpEx.

Pricing and Market Dynamics

Pricing for MLCCs remains stable, showing no significant changes expected across various segments, including AI. The company maintains long-term relationships with customers in industrial segments, governed by multi-year agreements, ensuring steadiness in pricing despite cost fluctuations.

CapEx and Future Expansion

Yageo projects consistent CapEx spending, around 15-20% of EBITDA, focusing on maintenance rather than aggressive expansion. The new factory in Guangzhou continues to ramp up, indicating preparedness for a potential market rebound. The company also remains vigilant about geopolitical issues and potential impacts on tariffs.

Strategic Investments and Market Position

Yageo's investments in UPI and APAC align with its strategy to grow in the power semiconductor space. This ongoing investment strategy aims to build a more diversified and resilient portfolio, contributing to Yageo’s long-term growth objectives. Financial contributions from these investments are currently reflected in the non-operating income.

Earnings Call Transcript 2024-Q2

[Howard Kao, analyst]

Hi. Good afternoon, everyone, and thank you for joining us today for Yageo's second quarter results webcast. Yageo is the world's largest supplier of chip resistor and tantalum capacitors as well as a top 3 supplier for MLCCs and inductors.

My name is Howard Kao and I'm the coverage analyst here at Morgan Stanley. We are very honored again to Mr. David Wang, CEO; Mr. Eddie Chen, CFO; and Mr. Claudio Lollini, Head of Global Sales and Marketing of Yageo here with us today.

And we look forward to their insights and comments on the company as well as the market. The management team will first walk us through second quarter results and also provide some forward-looking commentary and after that, we will open it up to questions. At any time during the webcast, you can send in your questions in the text box on your screen.

And now I would like to turn it over to Eddie. Eddie, please, go ahead.

[Eddie Y.S. Chen, executive]

Yes. Thank you, Howard. So let me start off today's conference with some financial recap. Okay. So second quarter, the company has reported TWD 31.4 billion sales, which is 10.2% growth sequentially. This is actually a better performance than our guidance from last conference. The market has actually gone better than we had expected, predominantly from the AI-related sales momentum as well as some consumers products.

The gross margin also improved to 35.1% or TWD 11 billion. That's about 1.3 percentage points better than the previous quarter. This is also for the past 2 years, the first time we were able to back up -- go back up to the 35% gross margin.

And on the OpEx, we're able to exert a good control on the operating expenses in the second quarter in terms of both the absolute dollar terms as more as the percentage compared with the other prior quarter. So TWD 4.5 billion spending OpEx dollars compared to TWD 4.6 billion in the previous quarter and 14.5% versus 16.4% in the first quarter.

So the operating margin comes in at slightly above 20% or TWD 6.5 billion compared to TWD 4.5 billion -- close to TWD 5 billion in last quarter.

On the non-op, coming in at TWD 923 million, slightly less than the previous quarter. But then if you recall, first quarter, we had some one of divestitures of our investments in Japan. So we've netted in some capital gains in the first quarter.

So taking that way, I think we're seeing a pretty similar performance on the non-op quarter-over-quarter. The net income comes in at TWD 5.5 billion or 17.5% net operating -- net income margin. EPS at TWD 13.02 per share versus TWD 11.02 in the previous quarter. So quite an improvement from there. And EBITDA at TWD 8.6 billion or 27.6% EBITDA margin, also better than previous quarter.

And if we compare cyclically versus last year second quarter, we were talking about 17.4% year-over-year growth for the second quarter. And obviously, we don't really have the Telemecanique in the second quarter last year. But then again, I think the other line business are showing improvements as well.

The gross margin also improvement in -- by about 1.9 percentage points versus last year. OpEx percentage-wise, slightly higher than the previous quarter -- than the last quarter in '23 largely because of the addition of the new acquired entities in Telemecanique.

So operating margin at 20.6% versus 19% also improved by about 1.7 percentage points. Non-op pretty decent last year because of some foreign exchange benefits that we have. The net income or EPS last year second quarter at close to TWD 9 per share versus TWD 13 this quarter.

If we compare the first half this year versus first half last year, you see that the top line for the first half 2024, comes close to TWD 60 billion, which is about 13.4% growth from first half last year. Gross margin improved as well from 33.1 percentage to 34.5% in first half this year.

Again, the operating profit slightly better as well, 19.1% versus 19% first half last year. Non-op first half this year is slightly better than the previous. So the net income for the first half comes in at TWD 10 billion -- slightly over TWD 10 billion or close to 17% net income margin versus TWD 7.8 billion last -- first half last year or 14.8%.

EBITDA comparable at 26.6% EBITDA margin percentage-wise, but EBITDA dollar first half this year comes in at about TWD 15.9 billion or close to of TWD 16 billion.

And EPS first half this year, TWD 24.04 versus TWD 18.8 first half last year. So you can see sequentially or cyclically, I think we're seeing a much better performance first half this year.

Let's take a look at the sales mix by different perspectives. On product wise, you can see some slowdown -- slowing down the momentum in the MLCC segments, sensors quarter-over-quarter. This is largely from the softer momentum in some industrial applications that we would see, in some cases, the auto is kind of flattish as well.

So we've seen tantalum is picking up the momentum. So sequentially, we're seeing about 2% quarter-over-quarter change in terms of the product mix.

Region-wise, you can see that Europe is probably suffering more than the rest of the world. We're seeing a decline of 3% quarter-over-quarter in terms of our sales mix. But U.S. and China are picking up momentum here. So kind of like [indiscernible] the decline in the Europe region.

In terms of the sales by channel, not much difference there. The swap between Global Distributors and EMS, which is very marginally. So the display is pretty much intact here.

And in terms of the segment, I think we're seeing kind of some softness in the industrial sectors, whereas the others are either maintaining its dynamics for some improvements, especially on computing and the consumer sectors.

Let's take a look at the balance sheet. We continue to increase the cash level. You can see that the TWD 92 billion cash and cash equivalents on hand as of the end of second quarter this year that compared to TWD 83 billion or TWD 84 billion in the previous quarter, increased by about 10% compared to same period last year.

We're talking about 25% growth in terms of cash balance that we have on hand. On the receivable as of the end of June, we're having about TWD 23.6 billion receivable balance, that's up about 10% from the previous quarter, but then it's pretty much in line with the sales growth.

And inventory is kind of flat in terms of the absolute value. So the turnover there has actually come up a little bit because of the increase of the sales in the second quarter, we're probably talking about the improvement of the turnover days from about 130 days to about 120 days.

Liability side, payable at TWD 14.8 versus TWD 13.6 billion in the previous quarter. So if you include the receivable inventory and payable then you will see better cash conversion cycle in the second quarter.

On the equity side, again, increased by about 5.4 percentage points sequentially, so about TWD 146 billion on the total net equity. So the gearing is improving as well as liquidity. The net debt to equity standing at about 16.7% versus 18% last year. This is still higher than the 11.2% that was before we leveraged our acquisition in Telemecanique. So I think we're on the right track to continue to see the -- to see the continuous improvement of the gearing -- or the use of gearing.

And the net debt to EBITDA slightly less than 80%, better than the 86.4% in the previous quarter. And ROE and -- quarterly or annualized holding through marginally from the previous quarter or from last year. So that wraps up the financial performance in the first half. So I'll let David comment on guidance.

[Deng-Rue Wang, executive]

Thank you, Eddie. So for next quarter, quarter 3, or revenue, we will guide the low single-digit growth. And a couple of reasons. First, we still see the AI computing, communication, consumer-related segment. still in a positive growth momentum.

Secondly, we see the channel inventory. They are in a healthy condition. So we do expect that they might still replenish their inventory. However, we will not see -- we don't see that there will be a V shape, a very sharp increase, but a very reasonable milder demand. This is the reason we guided the low single-digit growth.

It terms on gross margin percentage, we also guided below single-digit percentage improvement. And the same for a couple of reasons. First, we see the market currently, the pricing is relatively stable. Secondly, a very important reason is that we see the utilization in quarter 3 was slightly improved.

In terms of commodity the utilization rate we expect from the quarter to around 55%, then up to the 65%. Premium segment -- premium product, the utilization will be from quarter 2, 70% to next quarters quarter 3, 75%.

And we do still have a number of continuous cost improvement programs in hand. So all this will contribute on our guidance a low single-digit percentage improvement. And operating expense will be still under control and then consequently the operating income percentage. So we will guide the year low single-digit percentage improvement. Thank you, Howard.

[Howard Kao, analyst]

Thank you, Eddie, for the comprehensive second quarter review and thank you, David, for your third quarter guidance. [Operator Instructions]

So while we wait for questions to come in, maybe I can start with the first question. So second quarter obviously came in quite a bit better than expectation. Can you talk about -- a little bit about this -- the demand coming from AI and consumer that you saw? And what changed during the quarter that caused revenues to come in roughly 7% to 8% higher than expected?

And maybe a follow-up to that is, do you think something like this could happen again in Q3?

[Deng-Rue Wang, executive]

Yes, Howard. I can add some color to that. The AI in general, they are specifically in computing segment in general, has been very positive this calendar year. We saw that trend already in Q1, and it accelerated a little beyond our expectation in Q2. We continue to see very solid demand generated by AI-driven application server, but also notebook, laptop.

Great China in general as the region has performed a little better than we anticipated. And so far, the indicators that we have on that similar trend for the remainder of the year. Obviously, we have other regions and other segments that come that affect the guidance that we just shared with you.

[Howard Kao, analyst]

Got it. So maybe just a quick follow-up on that. So when we look at your second quarter revenues came in 78% better than expected. Then you said the majority of this is driven by AI. So is it safe to assume that AI revenue as part -- as a percentage of your total revenue is maybe around mid-single-digit contribution currently?

[Deng-Rue Wang, executive]

It was not just AI. It was also driven by other segments that were quite depressed last year consumer as a whole. And we noticed that segment, including the laptop and notebook, just personal computing space improving. Within that, certainly, there is an AI component. We do not track revenue linked to AI specifically.

So it is hard for us to comment and give percentage related to an AI segment. We know certainly that inside those segments, the component usage is increasing due to AI, but we do not track specifically how much revenue comes from in AI segment for us.

[Howard Kao, analyst]

Got it. I feel like I asked this question every single quarter, but I guess I do have to try. In terms of your tantalum capacitors business, you guys mentioned that it was a little bit stronger than expected in the second quarter. Is this mainly coming from the PC segment or automotive? And do you expect this to continue to improve into the second half of the year?

[Deng-Rue Wang, executive]

Largest portion was notebook. You see laptop, but also SSD, solid state drive. And along with that, also the server space. Tantalum polymer is predominantly used whenever there is a requirement for high performance and high energy within a tight space. So because of that laptop notebook SSD but also in the server space and automotive for EV segment has seen a continuous increase of adoption of tantalum polymer. All of these segments were doing really well in Q2.

[Howard Kao, analyst]

Got it. And can we expect this to continue to improve going into the second half of the year? Is that something that we can expect?

[Deng-Rue Wang, executive]

Yes. So far, we've seen positive momentum in the bookings not just the billing for tantalum. We see we're building backlog, which is something that we did not see for the most part of last year, we were actually growing backlog. So that has been good to see. So those are positive indicators. And demand is always dependent on market and that tends to change very rapidly, right? But, for now I can say book-to-bill has been positive. Booking is stable and backlog is slightly building.

[Howard Kao, analyst]

Got it. In terms of your third quarter revenue guidance, there's a question here comparing what you guys are guiding for versus the total seasonality. So can you just talk a little bit about why the third quarter kind of top line outlook is looking slightly weaker than your historical seasonality?

[Deng-Rue Wang, executive]

As I said, there are pockets of growth. And then there are pockets where we noticed the market being a bit more slow and certainly, I would include the European region. And within that, the industrial segment has two areas, as an example, where we have not seen the end demand being as strong as last year, for example. So whenever you combine all of these different inputs being a global business, we have areas that are -- continue to do really well.

And then we have areas that may go through a period of rebalancing of the end demand. So when you combine this together, I think that's how you come up with a Q3 guidance for growth but low single digit.

[Howard Kao, analyst]

Got it. And if we dig into the details a little bit in terms of inventory, I know you guys mentioned that inventory levels are healthy. But would you say that maybe some of the better revenue momentum that led to the outperformance in the second quarter. Some of this was inventory stocking, which is why third quarter revenue outlook maybe is not as strong from a seasonality perspective?

[Deng-Rue Wang, executive]

When it comes to inventory held by our channel partner, that decline has been actually stable for more than a year now. The channel as a whole accumulated a lot of inventory over the last year, and then we worked contingently with them to help adjust that inventory. So that trend has been very stable, very much under control. It will continue in Q3. I don't expect Q3 to come in anything different because of a different trend that will be the same.

There are other pockets of inventory that are sitting on our direct customer or our EMS partner where we have less visibility. In general, the channel has been placing more orders. They noticed their inventory level to be in some products, in some area to a point where they needed to do some strong restocking, and we've seen some of that in Q2, but if the market holds in the same way that it was so far, that inventory restocking will replicate in Q3 as well, although it's very difficult to model at the moment.

[Howard Kao, analyst]

Got it. And in terms of the utilization rate targets that you guys mentioned just now with commodity increasing from 55% to 65% in Q3 in premium up 5 percentage points to 75% in the third quarter. How should we think about those increases on UTR versus the low single-digit revenue guidance. Does that mean from a blended ASP perspective, we're expecting a decline sequentially?

[Deng-Rue Wang, executive]

I think in the quarters, we have tried to balance or control our inventory carefully. So there are two things. One is considered the overall inventory. The other one is the stock availability. Now by the end of Q2, actually in the whole Q2, we see the inventory level, especially in the commodity is getting lower. So that's why we want to increase the utilization, trying to build up our healthy inventory. So not only to support that revenue is really building our own healthy inventory level.

[Howard Kao, analyst]

Got it. And so that plays into the margin guidance that you guys have provided just now because higher utilization rate overall will help lower the average cost per unit. Is that the right way to think about third quarter?

[Deng-Rue Wang, executive]

Yes, that's correct.

[Howard Kao, analyst]

Got it. Got it. So in terms of the end segments for the third quarter, I think you guys mentioned industrial is still relatively weak. Automotive maybe still not doing so well. But in terms of smartphones and PCs and servers, for these three end segments, from your perspective, is there any one particular segment that are stronger than the other? Or how would you rank the kind of growth outlook for these three end segments?

[Deng-Rue Wang, executive]

We probably rank Q3 in a similar way as year-to-date. So consumer laptop, notebook, smartphone, SSD, server. This block is -- so far has performed very well, and we think that, that will continue. And then on the other hand, you have industrial in particular -- in a couple of particular region that was not growing as fast as the other segment at suspension and this Q3 will follow a very similar trend now, no major changes there.

[Howard Kao, analyst]

Got it. In terms of automotive and industrial, though, is there any expectation on when things can start to improve from your perspective? Like should we expect this to continue to be weak going into Q4? Or should we expect some recovery towards year-end?

[Deng-Rue Wang, executive]

Automotive has been very dynamic. When you look at the segment specifics, you will see that certain customers continue to grow year-over-year. Even from Europe, the tremendous performance where some of the largest European OEMs in automotive. The Great China segment in automotive is also performing well.

So I would say that for automotive, we've seen some program a little bit postponed or redesigned. But in general, the segment is not weak. It's also in the middle of an electrification, which makes the segment very, very dynamic.

Now Industrial is more traditional, to some extent, more predictable. And a majority of that production comes out of Europe for us. And for that particular customer and segment point of view, I believe that the remainder of the year will be pretty much the same of the first half. So we'll probably look at next year for the stock to digest and demand pick up stronger.

[Howard Kao, analyst]

In terms of your OpEx ratio, you guys have done, I think, a tremendous job in the second quarter, both from, as you mentioned, from an absolute dollar perspective but also from OpEx ratio percentage perspective. Is there any kind of new targets that you can share with us, something where you can kind of track over the next couple of quarters. For example, we're at 14.5% now. Is there like a period of time where you think this could fall to 13% or 13.5%?

[Eddie Y.S. Chen, executive]

Well, I think the structure of the OpEx is such that we will continue to see the sequential improvement over time, especially with regards to certain transactional costs that has something to do with the acquisition last year. So I think with that continuing to dissipate, we should be able to see certain improvement on the OpEx front.

But I don't have a long-term targets per se for that matter. But then I think gradual improvement is what we're pretty much seeing right now, and we would be able to continue that trend.

[Deng-Rue Wang, executive]

And Howard, the other way to look at the operating expense is, if you see the entire OpEx, only a small percentage in distribution cost, is highly linked to the revenue. So this will consider a variable cost. All others, relatively, they are very stable fixed cost. So [indiscernible] the percentage. So what we are trying to do is control or improve the operating expense spending, but the percentage really come on very much on the revenue momentum. That's why we cannot give you exact the OpEx percentage guidance.

[Howard Kao, analyst]

Got it. Thank you. I think that's a very, very kind of good point you guys raised. But is there a further color you guys can share on like what percentage -- you guys mentioned a small -- only a small percentage is linked to revenue, but kind of -- any color on what range that would be within the OpEx that has been to revenue?

[Deng-Rue Wang, executive]

Around 2% to 3%. This is the distribution cost. So we got a variable cost into the revenue.

[Howard Kao, analyst]

Got it. And I will be -- so pricing, there is something that we do have to touch on every quarter as well. So first, on MLCC pricing, I think there's been some news that pricing for MLCCs are moving up, I know you guys mentioned that pricing is still stable just now in your prepared remarks. But any particular color you guys can share on different end segments maybe the pricing trends? Maybe AI is seeing better pricing trends versus consumer?

[Deng-Rue Wang, executive]

Not really. We haven't really detected any significant price change for MLCC or for the segments you mentioned. We continue to monitor. Obviously, we know, especially in the consumer segment for commodity that can be very dynamic, and we are always ready to monitor and adjust depending on the market, the supply and the demand. But for now, I will save it in paper.

[Howard Kao, analyst]

What about for inductors? I know I think some of your Japanese peers recently have raised prices for inductors due to an increase in terms of the cost for [indiscernible]. Is this something that you guys are also looking to do? Or is it something that you guys have already done?

[Deng-Rue Wang, executive]

No. Also for industrial. Our policy is to engage with our customers for long-term relationships. You think about our customer base in that segment, in particular, the type of platform that we support. In many cases, those are multiyear platforms and engagement and -- in quite a few cases, are governed by multiyear agreements, and we work with our customers to honor those agreements.

We haven't noticed any desire to adjust pricing one way or the other, despite the demand being, in some cases, softer than anticipated.

[Howard Kao, analyst]

I see. So -- but it's a matter of increase in terms of the cost structure, does that mean you guys would just, I guess, take on that margin hit yourselves?

[Deng-Rue Wang, executive]

We haven't really suffered a large cost impact in that segment, Howard.

[Howard Kao, analyst]

I see. Okay. Got it. But -- or I guess maybe another way to try to ask this question is, historically, what is Yageo's policy on the pricing front when a certain product's cost structure is increasing at a slightly faster-than-expected pace?

[Deng-Rue Wang, executive]

Certainly, we had seen in the past examples where we no longer could absorb or find ways to digest a significant increase in cost. And therefore, we start reflecting that different cost structure in our conversations with our customers, mostly from new negotiations and new contracts. In some case, depending on the customer or the engagement also on the running business. But we are not in that situation at the moment.

[Howard Kao, analyst]

Got it. Very clear. And so there's a question here on your BB ratio in Q2 and how that is expected to change in Q3?

[Deng-Rue Wang, executive]

The ratio was positive in Q2, around one or slightly better across all products and all segments really. And we -- as I said, some of that was driven by the channel restocking and seeing their inventory level getting very healthy. We believe Q3 will follow the same trend.

[Howard Kao, analyst]

In terms of building your own inventory in the third quarter, is there any particular end segments where inventory levels are substantially lower for you guys?

[Deng-Rue Wang, executive]

And when we build up the inventory, we don't really build up for segment. Certainly, the segment, the end demand will influence the inventory control, but we see the overall inventory, especially that in the commodity type, we see the inventory level today is a little bit lower. That's why we increased the utilization in commodity will be higher from 55% to 65%. But the inventory level is in general, not for particular segment.

[Howard Kao, analyst]

Got it. And there's another question here on automotive. I guess the question is across the supply chain for automotive, we've seen a lot of companies suffer more significantly than Yageo, for example. So from your perspective, why do you think Yageo kind of saw a slow -- or a downturn that is less steep compared to some of your automotive peers?

[Deng-Rue Wang, executive]

A lot of that is also driven by designing activity and platform and technology adoption. And Yageo had -- in position in automotive that was built over many years, but was not as strong as the one that, for example, KEMET brought. And so over the last few years, we were able to leverage the relationship and the presence that KEMET ahead in those large automotive customers and use that to introduce more products from the Yageo group portfolio.

And it takes years to build that position. And I believe now after we are approaching the fourth year anniversary of the acquisition of KEMET, we now see in many new platforms, the adoption of more products from Yageo. In some cases, that helped to counterbalance some slowdown on the segment. So we were gaining share for sure in certain technologies within automotive.

[Howard Kao, analyst]

Got it. Got it. Very clear. And so there's a question here on -- from a cycle perspective, I think you guys mentioned that you were not expecting a V-shaped recovery. Is there any kind of guidance you guys can provide for when you think utilization rates can reach above 90%?

[Deng-Rue Wang, executive]

These are very good questions. That depends on actually the end market demand, also our inventory. And certainly, we do hope that gradually because of the higher demand, then we can increase the utilization rate, but that today, I cannot give you an outlook -- a forward-looking forecast to 90%. But because of the end demand, if the end demand is improving, certainly, we will gradually build up our utilization.

[Howard Kao, analyst]

Got it. And in terms of your CapEx and kind of capacity plans over the next 1 to 2 years, Eddie, could you help us review that, your CapEx guidance for this year and maybe next year and where you guys are planning on adding capacity?

[Eddie Y.S. Chen, executive]

Yes. I think we've never really aggressively expanding capacity is obviously because of the okay UTR, so it's more like a maintenance CapEx and whatnot. So all in all, I think we're still spending about a 15%, 20% of our EBITDA in the CapEx, maybe slightly higher depending on the market situations. But then we're not deviating too much from that past.

[Howard Kao, analyst]

Got it. And if I recall, you guys have a new factory in Guangzhou, that is ramping up. Is that still on track for the second half of this year?

[Eddie Y.S. Chen, executive]

Yes. I think we're still ramping up, and we're prepared with that, obviously, for some new products and some customer audit and whatnot. So I think we're prepared capacity in anticipation of the market come back. So that Phase 1 expansion is still on that.

[Howard Kao, analyst]

Got it. And do you guys have any views on tariffs potentially if they were to come back again?

[Eddie Y.S. Chen, executive]

I'm sorry, come again, Howard?

[Howard Kao, analyst]

Do you guys have any views on potential tariff? And how that would impact your business?

[Eddie Y.S. Chen, executive]

Well, obviously, the complexity of [indiscernible] we don't know how to expect yet. I mean, there are different scenarios and different simulations going on. So far, what we would like to see -- what we would like to expect that the tariff impact shouldn't be too much yet. But then given the dynamics that's happening in the geopolitics, the situations, it's hard to predict, honestly. So we just have to see it flexible.

[Howard Kao, analyst]

Got it. There's -- are you guys thinking about -- or does your customers want you guys to have capacity outside of both Taiwan and China. Is that a conversation you guys are having with your customers? Or does that not come up though?

[Deng-Rue Wang, executive]

Yes, and this -- the whole industry has been discussing resiliency plans. And sometimes those resiliency plans have to do with different geographies or more related to natural disaster preventions and sometimes more to do with geopolitical tension. So obviously, the one we are discussing now has more to do with the geopolitical scenario between China and the United States.

And we have the ability to serve our customers from a multitude of factories for all the technologies or almost all the technologies we could use. Some customers are being more forward in requesting specific country of origin for our products. Some other customers just want to know that we have the flexibility. Some customers don't get at the moment.

Across all customers, I would say that even the ones that request some flexibility, they also have a market in China, and they still need to serve that market. And so, there is quite a focus also to continue to make sure that we stay present in that region and serve that region a little more locally, but we have those conversations ongoing, yes.

[Howard Kao, analyst]

I guess based on your conversation, would you say there is a bigger percentage of customers who don't care versus the customers who do care?

[Deng-Rue Wang, executive]

Depends on segment. Without giving out names, but if you look at certain segments that have to do with telecommunication and the installation of 5G base stations and 5G network in general, those type of customers tend to be much more preoccupied with the source of the product. As you move towards more consumer-related segments, I would say that tension is. And then anything in between is depending case by case.

[Howard Kao, analyst]

Got it. Very clear. And maybe just coming back to AI again. So I guess when we look at your second quarter revenue results, would you say that the outperformance is purely driven by just overall better-than-expected demand and pull and restocking. And I guess you could describe this in many ways. Or would you say it's also a factor of maybe you guys qualifying for a new project that previously you guys were not expecting to qualify for and that started to ship in the second quarter?

[Deng-Rue Wang, executive]

There was nothing that we didn't expect that happened to the degree to drive the quarter to end better than expected. I think it was an overall demand that performance better than we anticipated. And within that, a variety of programs where we got design in and some of them accelerated, some of them happened earlier than we thought, but nothing unexpected in terms of a particular design that we didn't know it was coming in.

[Howard Kao, analyst]

Got it. And then lastly, maybe just want to touch on a few questions regarding kind of you guys' vision and progress into the power semi space. So can you just quickly remind investors of your rationale on the UPI investment? And how does this fit into the vision that you guys have to build on to your power semis kind of product roadmap?

[Eddie Y.S. Chen, executive]

Yes. Thank you, Howard. I think you take that as an extension of our investment strategies since the inception of the investment in extending. And following that, we have APAC investment and now we have PI. So you could follow the consistent track there that will continue to develop into this power IC management, this most fat world. So obviously, we're trying to find new momentum for our premium exposures, so to speak.

So right now, we're having about 20% in UPI. I can't say that when we're taking the full advantage of that, but that we're learning and we're trying to be part of that growth momentum and try to build on that basis to continue to expand our portfolio. I think that's just the investment strategy we continue to practice in the past year or 2.

[Howard Kao, analyst]

Got it. And so right now, all of these like UPI and APAC, they're all coming into the Yageo financials in non-op. Is that correct?

[Eddie Y.S. Chen, executive]

Yes, in terms of -- that's the average income, yes.

[Howard Kao, analyst]

Okay. And can you -- at the AGM, I think chairman Pierre Chen talked about how you guys want to compete against some of the bigger players in the power semi space, like PI. So within your vision and roadmap, what else are we missing here?

[Eddie Y.S. Chen, executive]

Well, I would say this is still very initial stage, right? If you look at the investment in this field, we can't say that we're up there against the big shots or the top guys. But I think we're learning along the way and try to find a synergy of those products with our general portfolio. So that's where we're at right now.

[Howard Kao, analyst]

Got it. And maybe just one last question here. Just coming back to kind of cycle question and overall inventories for your passive component business. You guys have been in a down cycle since the second half of '21. So it's been some time now. In the past, I guess, 2 years or a little bit more than 2 years. Was there any kind of write-off that you guys have done?

And if there is -- as demand gets better, is there any chance to see some of that recovery over the next couple of quarters?

[Eddie Y.S. Chen, executive]

I don't know how to rephrase your question. But then if you're looking into the potential growth along with some of our investments in the past several years, I think you can see that Yageo has been trying to seek a stable growth type of strategy, right? And then for the investments that we made, I mean, it's all pretty relevant to our overall portfolio.

And in terms of the growth momentum, it adds to our portfolio, but then it's asked in a very -- call it harmonious way. So -- I don't know if that's what you're asking.

[Howard Kao, analyst]

I guess my question is a bit more on, for example, like inventories. Maybe there were some inventories that were a bit aged. And so you guys figured these ones going to sell and so you guys wrote it off. But ultimately, demand came back and customers were still wanting these inventories that you guys wrote off, so you guys can now recover. Is this something that we potentially could see over the next couple of quarters?

[Eddie Y.S. Chen, executive]

I don't see a huge change of that. Well, if you look at inventory trajectories in development of the inventories in the past several quarters -- in the past 6 to 8 quarters, you continue to see that we're taking a very conservative approach in controlling our [indiscernible] as well as the mix of the inventory. So right now, we're saying about 120 days. This is probably, well, the lowest point in the past, if I recall, like 5 or 6 quarters consecutively.

So we're taking a pretty consistent approach in monitoring the production momentum as well as the market bulleted to digest those inventories. So with that practice, I don't see a huge change of inventory dynamics in the coming quarters other than continue to see very stable improvement and try to meet the market conditions.

[Howard Kao, analyst]

Got it. I think we have run through all the questions that are in the queue. So maybe let me pass it back to you guys to see if you guys have any closing remarks.

[Deng-Rue Wang, executive]

Thank you, Howard, and thank you for everyone's participation this afternoon. So again, for Q2 performance, we are happy to see that the final results is up to our expectation. And actually, revenue is slightly better than what we forecast. And we see this is really a good positive momentum.

Just remember, a couple of quarters ago, the last year or 2 years ago, it was starting the down trend than we see maybe it reached the bottom, now it did. So we see now we have a gradual recovery. We still see this positive momentum extended into next quarter. So hopefully, that -- the guidance we gave there, we will see a good growth for the next quarter. Thank you.

[Eddie Y.S. Chen, executive]

Thank you.

[Howard Kao, analyst]

So this concludes our webcast today. Thank you, David, Eddie and Claudio, and thank you, everyone, for joining us. We will see you guys next time.

[Deng-Rue Wang, executive]

Thank you.