Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2022-Q1

[Operator]

Welcome, everyone to Chroma's 2022 First Quarter Earnings Conference Call. [Operator Instructions] For your information, a webcast replay will be available within an hour after the conference is finished. Please visit www.chroma.com.tw/investor/index under the Investor Relations section.

I will introduce CFO, Paul Ying. Mr. Ying, you may begin.

[Paul Ying, executive]

Thank you, Mark. This is Paul Ying, CFO of Chroma in Taiwan and welcome, everyone, ladies and gentlemen, to joining our first quarter of 2022 financial release.

Well, first of all, let us see the first -- fourth quarter consolidated income statement. This is on the Slide #5. If we look at the net sales for the consolidated of Chroma Group, you can see that it reaches -- the first quarter reaches at the TWD 4.3 billion, close to TWD 4.4 billion. Compared to last quarter, it's a 4% drop. But compared to last year, it's a 3% growth. And within that, you can see that our core business of the Testing Equipment business, it reaches at the TWD 3.4 billion, and this is a 2% drop compared to last quarter, but 4% growth compared to last year.

And for the MAS operation, it comes up to TWD 221 million, and this is 18% drop on a quarter-over-quarter base, but compared to last year, it's a 55% growth. And for the Material business, it reaches at the TWD 618 million, and this is a 7% drop on a Q-over-Q basis and another 11% drop on a year-over-year base. And I have to remind you that this is the last quarter of the Material business putting on the consolidated numbers because our business of this Material business has terminated the agreement with the Japanese original brand name owner, which is the MMC of Japan.

So starting from the second quarter, there will be no Material business anymore. And this aggregated gross margin gave us 50% on the gross margin, and it comes to TWD 2.1 billion, close to TWD 2.2 billion, and this is also a 2% growth compared to last quarter and a 4% growth compared to last year. And again, on the operating income, it comes to the TWD 837 million, and this is 15% growth compared to last quarter and a 6% drop compared to last year.

On the non-operating part, if you look at the numbers, well, I think the comparison for the numbers compared to last year will be a big drop. Well, this is simply because last year, we had a gain from the disposal of property and plant, approximately TWD 1.7 billion. In this part, if we exclude this part from the last year, our net income of the first quarter of this year comes to TWD 858 million. Compared to last quarter, it's a 20% growth. And excluding the capital gain, it will be somewhere like a 17% growth. And so, we enjoy TWD 2.03 EPS on this profit on the first quarter of 2022, which is a record high of the quarterly net income and EPS. And this is the first time that quarterly EPS cross over the TWD 2.

And for the balance sheet highlights and the financial ratio, if you look at this page, I think the total assets is still growing. And I think the return on equity is fully on the target, which is 19%, close to 20%. And compared to the return on assets, it's 11% and over 10%, 2 digit. And for the free cash flow for the first quarter of this year, it's TWD 1.1 billion. This is the highlight of the consolidated income statement and the balance sheet.

If we turn to see the parent company on the next slide, you can see that the bar chart for the last few quarters and you can easily see that sales revenue of TWD 2.8 billion. This is a 19% growth on a quarter-over-quarter base and another 8% growth on the year-over-year base. And this is also the record high of the quarterly sales revenue for the parent company. Although, the gross margin, well, it comes to the -- pretty much like the average low for the last few quarters, 48%.

I think I leave it up to the next page to explain. And our operating margin is over 20%, which is 22%. And net income, close to TWD 852 million. This is a 29% growth compared to last quarter. And again, this is a 62% drop on a year-over-year base. But again, if we look at -- deduct the capital gain from the selling of the property and the plant, that will be somewhere like a 17% growth. The first quarter highlight of the growth is contributed from the Test Instrument and ATS sectors. These sectors presented a growth of 4% on a Q-over-Q base and 36% on a year-over-year percent.

If we go to see the detail for the income statement for the first quarter of 2022, you can look at the income statement, which shows that the first quarter, the gross margin is 48%. I think, there comes to 2 variances. One is for the -- for those long and short lead time material. I think this sector, this comes to the variance of the cost of those material costs, will approximately give us another 1.5% of those differences.

Another one will be unrealized -- those unrealized gross profit, which is although, we got the orders and we have finalized the shipment from Taiwan to the -- to our subsidiaries in Mainland China, I think those lockdown for the Eastern Coast and also for the difficulties for the shipment, gives those shipments still stay on the book of our subsidiaries. So, these parts in accounting, they will not put up in the realized profit. So, it's putting on the cost adjustment, which is meaning the unrealized gross profit. And -- but again, this part is kind of like a period kind of a difference. So, it will be realized on the next quarter, I think, definitely.

So, these parts, if we are putting that back, I think we're approximately still maintaining somewhere like 50% to 51% of the gross margin. So, if you look at the operating margin, it gave us the TWD 638 million. And compared to last year, it's -- compared to the last quarter, it's a 45% growth. And compared to last year, it's 8% drop. So, this is where we are. And for the non-operating items, you still can see that the effect of those disposal of the property and plant in the first quarter of last year, approximately TWD 1.7 billion. Again, if we deduct this part from the other income that gives us another 17% growth on the net income.

And if we look at the balance sheet highlights on next slide, you can see that, again, the total assets still growing. And again, for those return on equity, it's 19% and return on assets, it's 13%. And well, the free cash flow, still maintaining somewhere like TWD 200 million. So, that's the highlights for the financial numbers.

And for the next part, I will let Jennifer to explain to you those operation highlight.

[Jennifer Chieng, executive]

Okay. Thank you. Good afternoon, everyone. This quarter our operations highlights, please refer to Slide 11. Okay. I will go through each sectors. In the first quarter, Test Instruments increased by 4% quarter-over-quarter and 36% year-on-year. And slow growth compared to last year was mainly contributed by EV and high-power testing such as battery related and 5G power -- 5G server's power.

Next sector is Semiconductor and Photonics, which presents a growth of 7% quarter-over-quarter, but declined [ about ] 16% compared to last year. The first quarter -- I mean, in the first quarter, the major growth coming for -- is mainly coming from Photonic sectors, particularly come from these TEL equipment for optical fibers communications. We have seen the picking of the demand from this 5G communication sectors.

And next one, Turnkey Solutions, as we state in the previous quarters, Turnkey Solutions for parent companies here is mainly in charge of non-China areas. In this quarter, we have delivered around TWD 176 million, partially come from this Japan market and then some is battery cell, we think are some of the key modules that is shipping to China to for the final -- for the project in China.

And for the China part, we state from last quarter that is still ongoing, and we have assigned [indiscernible] in-charge of those orders. And you may refer to our consolidated balance sheet, the contract liabilities, our current review as a reference for this current holder on hand and current balance of that is around TWD 1.4 billion. And we expect the second -- coming second quarter sales revenue will be faster than our first quarter. And then this quarter will be mainly contributed by semiconductor sectors. That's including HPC, SLT Testers, will start to deliver from this quarter and then also the Photonics Tester for VCSEL for 3D sensing.

And that's pretty much wrap-out for the first quarter and also give a little bit color on the second quarter. And now we move on to Q&A.

[Operator]

[Operator Instructions] Our first question is coming from Arthur from Citi.

[Arthur Lai, analyst]

So, I have -- first of all, I want to congratulate for strong margin in the March quarter. Can I understand the margin trend from Photonics or other sectors? And question #2 is, did you hear any clients [indiscernible] since the lockdowns? And any [indiscernible] of the production disruption of U.S. clients as well?

[Jennifer Chieng, executive]

Arthur, this is Jennifer. So, I think our CFO has mentioned about the gross margin issues. I think the first factor has mainly come from, we do have those [indiscernible] because we -- you could say, people to explain this, we already deliver our goods to China or other overseas. The overseas remain China, such as, for example, like China, due to lockdown, those goods probably still parking on these overseas subsidiary and not yet delivered to the client site.

According to conservative accounting policy, from the subsidiary to the client site, the impact was probably [indiscernible] from the gross profit. And however, the orders do exist and those will be built in the following quarters. So, you may refer to that. In the first quarter, our financial statement states about [ TWD 80 million ] regarding to this so-called unearned operating gross profit and will be booked in the following quarters. And if you add on to that, I think our gross margin will back down to like around to 50% to 51%.

And second factor because we have this fluctuated raw materials in the first quarter, as you see the Russian war and also those economic factors, so, we definitely have some impact since our order is very strong and we need to buy out those raw materials. And those factors probably influence about 1% of our gross margins.

And second question regarding to China lockdowns. Well, we don't really have the manufacturing in China. And I think lockdown factors already say, for example, something like unearned gross profit, but we didn't see any significant impact from the so-called people canceled orders or postponed orders. I think pretty much is on schedule at the moment. And you may see, as I refer to from our consolidated balance sheet, we already started to book those some payments, which is, carrying the balance is [ around TWD 1.4 billion ].

[Operator]

[Operator Instructions] The next question is coming from Jennifer Zheng from JPMorgan.

[Jennifer Zheng;JPMorgan Chase & Co.;Financial Analyst, analyst]

I would like to ask this, so ATS was quite strong in first quarter. Can we know about more outlook in the second quarter? It will still be like sustainable? And second question from me is the U.S. dollar appreciation. Can I know the appreciation impact to the margin?

[Jennifer Chieng, executive]

I think, Testing, of course, because we know deliver based on the PO schedules. So, as Paul Ying already highlighted in the second quarter our major strong growth will be coming from semiconductors, which is scheduled to deliver. And so, it doesn't mean that, well, maybe [indiscernible] another 36% year-on-year, but I think they still quite have a pretty solid order on hand at the moment. I think the annual target is still achievable.

You are asking about U.S. dollar's appreciation. I think for exporting company, U.S. dollar strong, I think is a benefit to our company.

[Operator]

The next question is coming from Glenda, Value Partners.

[Glenda Hsia;Value Partners Group Limited;Senior Fund Manager, analyst]

Just a very quick follow-up questions on the previous discussion. First on the gross margin side because there is also some impact you mentioned on raw material part, while at the same time, some of the, maybe the components, which was in shortage might be able to have some easing situation towards the later part of the year. So, I just want to get your view on if that cost pressure impact happened in first quarter, would be a recurring one in your view towards the later part of the year or there could be an interim pressure on this?

[Jennifer Chieng, executive]

I think our long and short lead times raw material mainly come from the high-powered chips and we have several strategies. Even we see this kind of pricing will start to re-stabilize it from maybe mid of this year or from after second quarter. And one part of our strategy we think our design, you know, our Testers are mostly customized. So, for some of long lead time components, we already decided to change our design in place. Maybe we don't use the first year's components, but we could start use second year.

We do have these experiences before because before we do some -- you could say trial or just experiment, you know, half of Testers by using like a Tier 2 components and which has brought like the gross margin be further improve like cost down by 30%, 25% to 30%. And I think we will start this kind of strategy from second quarter. So -- but, you know, the first quarter due to this very unstable economic status and also the war, so actually, raw material gets really volatile and this is not something we're able to prepay forward.

[Glenda Hsia;Value Partners Group Limited;Senior Fund Manager, analyst]

And then second quick follow-up is, you mentioned second quarter, the -- you're still seeing the orders are quite healthy and no revision, et cetera. The Q-on-Q increase on second quarter's revenue, may I [indiscernible] is it for parent level, or is it more consolidated level, given you are exiting the Material business?

[Jennifer Chieng, executive]

I think based on our current order on hand, improved battery business, is highly possible to even consolidated basis would be better than the first quarter. Yes, because the parent company actually have quite decent or strong in the second quarter, yes.

[Glenda Hsia;Value Partners Group Limited;Senior Fund Manager, analyst]

So, on the order outlook side, it is -- actually year-to-date because there are a lot of worldwide events happening, but on the order book side, you are actually seeing it quite in line with what you have been seeing maybe at the year beginning?

[Jennifer Chieng, executive]

Well, okay, this year, we have about, you could say, half of our orders are mainly due to customers' new technology adoptions. And rolling out new technology or new technology investment, is kind of R&D investment is pretty much inelastic for those -- inelastic compared to these market changes, unless you have to see some situation here back even worse than year 2009. Okay?

So far, we didn't see that customers planning to postpone or cancel order. And then also another factor is this year, most of the order is not really deal with the consumer markets, mostly deal with 5G and the EV, but for even EV is not a downstream yet, still very much for the upstream like battery cell project. But there's no way, even if you are expecting EV to coming back next year, currently without battery cell, I can tell you battery cells is still under shortage.

[Operator]

[Operator Instructions] There are currently no questions. I will hand it over to CFO, Paul Ying, for closing remarks. Mr. Ying?

[Jennifer Chieng, executive]

Sorry, Mark, I take [ Kaixi Wang's ] questions, please.

[Operator]

Okay. The next question is coming from [ Kaixi Wang ] from Nomura site.

[Unknown Analyst]

May I ask this year seasonality, could you tell us about the seasonality this year? Is it still going up quarter-by-quarter no matter parent company or consolidated basis? This is my first question.

[Jennifer Chieng, executive]

Okay. All we can say like second and third quarter are quite big for this year, but we couldn't really sure whether second is highest or third quarter will be the highest, yes.

[Paul Ying, executive]

And putting that on the consideration of the Material business will be terminated starting from the second quarter. So, that will be a part of the -- of the top line on the Material, yes, on the consolidated base. So without that, well, I think Jennifer just answered your questions.

[Unknown Analyst]

So, we're not sure the peak season will be second quarter or third quarter. Is that correct?

[Jennifer Chieng, executive]

Yes, because some of the order already schedule up to third quarter. So definitely, battery cell and SLT have been scheduled these 2 quarters, yes.

[Unknown Analyst]

And my following question is about New Material. As you say, if we exclude New Material revenue, what will the company's consolidated basis gross margin will be? Could you give us a range for reference?

[Jennifer Chieng, executive]

Okay. I tracked our previous quarters and even I track back to 2020, 2021 and I see normally without New Material, consolidated gross margin is around 1% to 2% higher than parent company, yes.

[Unknown Analyst]

1% to 2% higher than parent company?

[Jennifer Chieng, executive]

Yes.

[Unknown Analyst]

And my third question is compared with the previous results conference call, we knew the market environment has changed a lot. I know you feel that the order has not changed. But could you give some more detail? Which ones have stronger, which ones are weaker, such as could you tell us about it, such as ATMS, such as semi? Could you give more color? That's my last question.

[Jennifer Chieng, executive]

Okay. Honestly, we noticed this year we have less exposure to consumer markets. And we still see quite strong from this HPC market. But we were quite surprised that picking up demand from this optical fiber communication. And actually, you could say that -- I mean quarter-over-quarter, the semiconductor sector's growth over even -- even you compared to last year, Photonics actually is quite a large portion in the first quarter this year. As you see last year, first half, Photonics sectors was significant down, yes.

So if we combine the coming up next 2 months, we're going to deliver these Photonics for VCSEL and you could see that Photonics sector this year will have acquired decent growth rate compared to last year, not only it will leave to these U.S. customers, but also including optical fibers, communication still increased, yes.

And honestly, okay -- China is still -- I mean I shouldn't say China, I should say Shanghai is still under lockdown. But -- and -- but we do see the China semiconductors still progressing. We still have a certain demand from these so-called legacy type IC Testers from this China market, yes. Besides that, we see quite a strong from this SLT, yes.

[Operator]

There are currently no questions. I will hand you over back to CFO, Paul Ying for closing remarks. Mr. Ying, please proceed.

[Paul Ying, executive]

Thank you. I think based on the financial performance of our first quarter of 2022, I think we are fully in line with our expectations and we will keep on the pace and reaching to the second quarter up to third quarter of this year. And thanks for your support.

Thank you, and bye-bye.

[Jennifer Chieng, executive]

Bye-bye.

[Operator]

Thank you. Thank you for your participation in Chroma's conference. There will be a webcast replay within an hour. Please visit www.chroma.com.tw/investor/index under the Investor Relations section. You may now disconnect. Goodbye.