Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2022-Q2

[Operator]

Welcome, everyone, to Chroma's 2022 Second 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 would like to introduce CFO, Paul Ying. Mr. Ying, you may begin.

[Paul Ying, executive]

Thanks, Mike. Well, welcome, everyone. Ladies and gentlemen, welcome to the 2022 first half the financial release for Chroma. Well, I think all of you have already got the -- those data sheet we send it to the website. If you look at the consolidated income statement of the first half, you can see that the sales revenue reached at the TWD 9.3 billion, compared to last year this is a 7% growth.

And this growth is mainly coming from the consolidated sales of the testing equipment business, which is the main and the core business of Chroma. And for this part, it reaches at the TWD 8.1 billion, compared to last year this is a 21% growth.

And for the automation process and the manufacturers of MAS, the MAS come up with the TWD 409 million, compared to last year this is a 12% growth. As to the sales of the New Material, for these sectors, we have already terminated a contract with the suppliers at the end of the first quarter. So if we look at the numbers here, it mainly is coming from the first quarter sales revenue.

For the second quarter, there is no contributions anymore since we have already terminated the contract. And this shows a 56% drop, but that's due to last year, we're still providing those materials to the market.

So here, you also can see that the gross margin due to the reduction of the low-margin portion of the New Material and the growth of the high-margin portion of the core business, you can see that the gross profit comes to 5 point -- approximately TWD 5.1 billion and to a gross rate -- gross margin rate to 55%. And this is also a 22% growth compared to last year. And compared to last year, the gross margin is somewhere like less than 50%, it's 48%. So this is a quite big growth.

And for the operating expenses, you can see that there's not much difference, well, with regard to the growth of the top line. And the operating income has come to TWD 2.2 billion, represent a 24% of the sales revenue. And this is a 49% growth compared to last year. And last year, the gross margin is only 17%. So there is a very good record.

And for the nonoperating items, well, for 2022 this year and the last year, all of this through the first half, have contributions regarding to the capital gain. For the year of 2022, this year, it comes from the second quarter, the gain of disposal of our investment, which is ADLINK, as a total number approximately TWD 500 million.

So last year, 2021, at the first quarter, we had a capital gain from disposal of property and the plant of our previous headquarters to ADLINK, and there is TWD 1.7 billion as the capital gain.

And the tax -- related tax for the capital gain is TWD 200 million. So it gives us net income after tax. It's somewhere like TWD 2.5 billion for this year. And it represent 8% decrease. Well, mainly it's due to the capital gain of last year of selling of the property and plant, which is -- have a very big contribution. So without that, we're still doing pretty good. For this first half of 2022, you can see that our EPS comes to somewhere a little bit less than WD 6, which is TWD 5.98.

As to the second quarter's income statement, if you look at the next slide, you can see that the -- for the second quarter, the total sales revenue contributed to TWD 4.9 billion compared to the last quarter, it's a 12% growth. And compared to last year, it's 11% growth.

Well, for the consolidated sales of testing equipment business, which is the core business, it goes to TWD 4.6 billion. And compared to last quarter, it's 15 -- it's a 34% growth and compared to last year, it's a 38% growth. As to the consolidated sales revenue of the MAS, it goes to the TWD 188 million. And compared to last quarter, it's a 15% drop; and compared to last year, it's another 15% drop.

Well, as to the material business, you can see that starting from this quarter, second quarter of '22, you can see there's no numbers -- or nearly no numbers contribution here. But well, for the last quarter or even last year, there are still somewhere like per quarter TWD 600 million something.

So in there, you can see due to the low margin and the high-value part of the business like material goes down, you can see -- clearly see that the second quarter of the Chroma on the consolidation basis, the gross margin comes to somewhere like 59%, which is a record high. And the number is somewhere close to TWD 2.9 billion. And this is a 33% growth on a Q-over-Q basis and 40% growth on a year-over-year basis.

Well, for the operating income, it goes to TWD 1.3 billion and represent 28% compared to the sales revenue, which is also a very good number. And this is a 63% growth on a Q-over-Q basis and about 132% growth compared to last year.

As to the net income for the second quarter, it goes to the TWD 1.6 billion. And compared to the last quarter, it's a 95% growth. And compared to the last year, this is a 245% growth.

If we give the capital income for that -- for the first -- for the second quarter of this year, so the EPS, well, TWD 3.95 will go to TWD 2.75. It's another record high for quarterly profit for the operating portion. So this is also a very good record for the second quarter stand-alone.

And for the balance sheet highlights, if you look at this page, you can see that for the cash and short-term investment, also the inventory is growing but at the same time, the short-term debt and the long-term debt is decreasing. So in there, on the consolidation basis, you can see that inventory turnover is a little bit more than the end of the last year. But I think it's due to those long-term, short-term kind of inventory status, and we still have to prepare for the future production. So I think that's something that's existing in all of those electronic industries for that.

As to the accounts receivable turnover date, it's a bit of an improved compared to last year's year-end. And our net debt to equity, right now for the consolidation basis, it's net cash. And free cash flow for the first half of this year is somewhere like TWD 2 billion.

So this is for the consolidation part of briefing. And for the quarterly numbers for the parent company, if we look at the second quarter next page, you can see the bar chart, there's a high jump at the second quarter of this year. And you can see that sales revenue reached at the TWD 3.7 billion, and this is a 30% growth on a Q-over-Q basis and another 52% growth on year-over-year. And for gross margin, we pretty much enjoy over 50%, which reaches at the 51%. And for the operating margin, again, 28%.

So either for the sales revenue for the parent company, we reached the record high. And also, the operating margin percentage has also reached another record high.

Our net income for the second quarter reached at the TWD 1.66 billion, and this is a 95% growth on a Q-over-Q basis and another 245% growth on a year-over-year basis. And for the second quarter, the major growth is coming from the semiconductor and photonics sectors. For these sectors, presented a growth of 67% growth on a Q-over-Q basis and another 82% growth on a year-over-year basis.

As to the second quarter, then along parent company income statement, you can look at the next slide, you can see that, again, for these record high TWD 3.72 billion compared to -- again compared to last quarter, it's a 30% growth. Compared to last year, it's a 52% growth. And the margin, again TWD 1.91 billion, and represent 51% and it's 40% growth and -- on Q-over-Q basis and it's 44% growth on a year-over-year base.

For the OpEx side, again, we're still facing the inflation on the -- and also recruiting kind of issues, and we put on those increase of the salary every year. So we have a little bit higher of the OpEx here. And -- but we presume this OpEx will be stable, say, starting from the first half of this year.

And operating income for the second quarter is a little bit over TWD 1 billion. It's TWD 1.04 billion represented 28% compared to the net sales revenue, which is also high point. And this is a 63% growth on a Q-over-Q basis and another 70% growth on a year-over-year basis. Again, as to the nonoperating items, I think the biggest items will be the TWD 500 million capital gain from the sale of our -- disposal of our investment of ADLINK. And this is also a big growth compared to last year. And for the net income, again, this is TWD 1.66 billion. It's a 95% growth on a Q-over-Q basis. It's another 245% growth on a year-over-year basis.

As to the EPS for the single quarter for the second quarter of this year, it reached at the TWD 3.95. And if we skip the capital gain of the disposal of the investment, then it reaches at the TWD 1.157 billion and it gives us TWD 2.75 as the EPS, which is another record high.

Well, if we look at the first half income statement for the parent company, again, the net sales revenue will be TWD 6.587 billion And compared to last year, it's a 29% growth. And gross margin somewhere like TWD 3.278 billion and represent 50% to the net sales. And it's a 20% growth.

And for those operating income, it reaches at the TWD 1.678 billion, represented 26% for the first half compared to the sales revenue. And this part will be 28% growth on a year-over-year basis. And for the first half, for the parent company, again, the nonoperating items were existing 2 capital income: one from the sales of the previous headquarters of last year and one for the disposal of the investment on this year.

So it gave us a net income at the TWD 2.512 billion. And although it's an 8% drop, but if we skip all those capital income for this year and last year, it gives us the net income without the disposal gain at the TWD 2.008 billion. And compared to last year, this is a 67% growth and reached at the TWD 4.78 for the core business EPS. Well, this is of the income statement.

If we look at the balance sheet for the parent company, you also look at the next slide, you can see that the short-term debt, long-term debt is also decreasing. And the inventory turnover maintained pretty much at the same level as the end of the last year. And for those accounts receivable turnover is pretty similar to accounts receivable and accounts payable turnover days. It's pretty similar to the end of last year. And again, the free cash flow is falling into somewhere that we feel comfortable and okay.

This is the kind of like highlight for the financial numbers. And for the operational highlights, I would like to let the Jennifer to briefing to you. Thank you.

[Jennifer Chieng, executive]

Good afternoon, everyone. This is Jennifer. I will give several key highlights regarding to our product mix breakdown. As you may see on the Slide 13, across all sectors, including testing instruments, semiconductor sectors and turnkey solutions, all sectors we have been present pretty good results and all increased by over 20%.

And this growth in the second quarter actually comes from the semiconductor and photonic sectors, which has increased by 67% quarter-on-quarter and 82% year-on-year. And we actually increased by 26% in the first half compared to last year first half. And our expectations for these factors for the whole year remains no change. We still expect this sector to grow by 20% or more for this year, okay?

And for the second half guidance, we actually expect the biggest growth has actually come from the EV industry, particularly EV battery cell formation systems. We actually received a quite decent or several large projects for this year and will be started to deliver from the second half of this year.

And we believe this kind of EV cycle funds well, not only benefit to the upstream, which is the battery cell formation system, but also will be contributed to the downstream like the EV battery pad, charging stations and several key components for EV.

So as you may see, the first half, our test measurements -- test instruments and ATS grew by 27% for the first half compared to last year, and we expect this sector to have a double-digit growth compared to last year. So overall, this year, we actually expect the second half should do better than the first half.

And even this year, we decided to terminate our noncore business, which is trading business, New Material business entities. And from second quarter, this business is going to no longer enjoy any sales contributions. And we believe that we're able to offset this kind of self from our EV-related business.

So this is pretty much wrap up for our operation highlights, and we could move on to Q&A.

[Operator]

[Operator Instructions] Our first question is coming from Mondrian Investment Partners, Harry Anderson.

[Harry Anderson, analyst]

I might have missed it, just now. Could you briefly explain your outlook for the semi-photonics business in the second half and maybe into 2023. Obviously, you've had a very strong first half. So maybe how that impacts relative to kind of the high basis of the first half?

[Jennifer Chieng, executive]

Okay. Our semiconductor and photonic sectors, actually, we're the biggest growth in the second quarter, as you may see from the sales write-downs. We are actually expecting this sector to grow to 20% or more this year. So our guidance remain no change compared to the -- I mean the beginning of the year [indiscernible].

And as we continue to see the growth coming from the auto IC and the 5G-related chips, we don't cover very much regarding to the consumers' parts. And we actually try to bring the new customers for the coming next year, especially for the foundry customers and also couple HPC maker from United States.

[Harry Anderson, analyst]

And do you have any guidance for that 2023 outlook? Can you maintain that kind of double-digit outlook? Can you continue to grow maybe 20% next year as well?

[Jennifer Chieng, executive]

We haven't really moved on to the budget yet, but this is definitely one of the targets because we have remained like 4 years average growth rate between 20% and 30%, but we're actually working on several projects at the moment. I think the biggest growth drivers still come from this HPC related. And regard to photonics sectors, we actually have a couple of projects on hand regarding to the customers' wearable devices. We couldn't disclose more details at the moment, yes.

[Operator]

[Operator Instructions] The next question is coming from JPMorgan, Jerry Tsai.

[Jerry Tsai, analyst]

I just have a couple of questions about first of about SLT. Can you maybe comment on what are you seeing in terms of SLT demand in the second half? And also, I'm wondering the SLT growth you've been seeing, is it mostly due to -- the growth is mostly coming from the increase in number of customers? Or it just simply maybe you have an increase in order from the same group of customers you normally deal with? That's my first question. And maybe you can also add a little bit about the SLT competitive landscape, yes.

[Jennifer Chieng, executive]

Okay. In the first half, our semiconductors and photonics sectors, we generated around TWD 2.3 billion. And honestly, I would say around 60% has come from IC testers and 40% photonic sectors. And I think the HPC-related customer, I mean, the SLT testers, the major shipment is actually started from end of second quarter and close to third quarter.

So this year, the biggest order actually comes from our existing customers. And we also working on with a couple of new customers at the moment, and we also received qualified by the foundry customers. And we hope the foundry customer will start to buying the SLT from end of this year. And hopefully, they will become the biggest buyer in the coming next year, so that's for SLT.

[Jerry Tsai, analyst]

Okay. So maybe you can also talk a little bit about the competitive landscape because we do see some niche testing company in the Asia region, plus also you have like maybe big global testing firm also doing this. Maybe you can tell us a little bit about what -- in terms of what you face in the competition, normally?

[Jennifer Chieng, executive]

We actually try to gain the market share and also [ close to ] foundry customers. And so far, we didn't see any one in market, who has the same feature and also send throughput and die size, which can compete -- will compare to our upgrade SLT testers. I think we demoed in our -- I think you may refer to our Slide 15, this is actually the biggest buying and being qualified by the foundry customers this date, as not only simply as the SLT also blend a little bit feature of FT, final testing.

And this well helping our customers to reduce the utilizations for FT testing. So according to customers' feedback, they still think our SLT tester is covered the full functions with the full feature. And also regarding the tri-temperature, we are the biggest range for this temperature simulations. So can you refer several competitors that we can benchmark with?

[Jerry Tsai, analyst]

Okay. I see. That sounds quite interesting. Okay. Also like to quickly ask about the battery formation, I think that's, as you mentioned, is the main key driver for this year. Can you let me comment about the backlog situation you have seen in the past, say, 3 months, like maybe since the last quarterly update? And what have you seen in terms of the backlog, how it changed? And also, in terms of like realizing the revenue, right, and do you see any kind of troubles or any kind of issues of booking the revenue this year due to the -- maybe some kind of logistic issues?

[Jennifer Chieng, executive]

Okay. We do see the EV industry market share start to change from this year, especially you may see our strong battery sales orders, mainly come from the European cars, okay? And so probably by next year, you won't see just 1 particularly EV makers in the market, but also several include other like EV Europe OEM, okay?

And you may refer to our consolidated balance sheet, end of the March -- sorry, end of the June, our receiving in advance cash balance reach up to TWD 1.8 billion compared to last quarter, it's around TWD 1.4 billion. We actually increased by like a TWD 400 million or TWD 500 million, yes. So that be equivalent to the second half, supposed to have like more than 2 billion order on hand.

Our challenge is we have to deliver those orders and to meet the customers' expectations on the criteria and also the date. So we're able to secure our coming order in 2023.

[Jerry Tsai, analyst]

Yes. Okay. Just to be clear, the latest number you talked about for the TWD 1.8 billion of prepayments received, it's related to the project that you'll be delivering this year or some of those projects could be for next year's project?

[Jennifer Chieng, executive]

Let me put in this way, we have this challenge to deliver those orders this year, as I say, this will help us to secure our order next year. So delivery on time is must have according to the contract. So I don't think we're able to postpone or delay delivery.

[Jerry Tsai, analyst]

So you're saying that's TWD 1.8 billion most -- not you have some special agreement like most likely is related to the project that you will be delivering for this year, right?

[Jennifer Chieng, executive]

Whatever we give a guidance regarding to EV battery cells in the fall this year, but because right now, we are already under discussion for the next year's order. So this year, we need to deliver our commitment.

[Jerry Tsai, analyst]

Got you. I guess maybe one last question about this and this will be -- maybe you can tell us a little bit about what do you think about the 2023 outlook for this battery cell after seeing quite strong growth in 2022 and maybe kind of share with us about the regional kind of breakdown of the growth?

[Jennifer Chieng, executive]

Actually, we have 2 growth drivers. One is actually come from China and the customers behind is a European OEM. And just for potential order size, the only thing I could say is definitely cannot be just 1 year short because this is like a confirmed or you could say exactly the battery cells, those are large European OEMs required, okay?

And another driver we just -- maybe our Chairman has been mentioned in the Chinese call that [indiscernible] U.S. EV makers, they are going to change to these new models of EV battery cells. And in the second quarter, this is the biggest project we delivered to Japan, and -- as the new equipment makers. So we believe this year, mostly tied around and we expect this production line will be started to ramp up at end of this year. So -- this indicates that next year, this will be another driver for our EV battery cell projects.

[Operator]

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

[Paul Ying, executive]

Well, if you look at the financial results for the second quarter and also the first half of this year, it seems to us that we made a very good achievement here. And we will do our best and maintain this kind of -- this momentum and also the statements and trying to reach that we committed on the -- at the beginning of this year and for the second half of this year. And before that, I wish you everybody have a very good day, and goodbye.

[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.