Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2021-Q4

[Operator]

Welcome, everyone, to Chroma's 2021 Fourth Quarter Earnings Conference Call. [Operator Instructions] For 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 introduce CFO, Paul Ying, Mr. Ying, you may begin.

[Paul Ying, executive]

Thank you. Hello, my dearest investors, ladies and gentlemen, welcome to the 2021 -- the fourth quarter earnings conference call of Chroma. This is Paul Ying, well, I will be the one who will present the financial results for the year of 2021, including the fourth quarter's -- our achievements.

Well, we started with the presentation #5. First of all, I would like to highlight is the -- if you look at the consolidated sales it's approximately TWD 17 billion -- TWD 17.6 billion, which reaches to the record high of Chroma in consolidated sales. And this is also the consecutively in 5 years, the core competency of Chroma's test and measurement portion growing year-by-year. And the net income for 2021 is approximately TWD 4.2 billion.

And as to the consolidated entity it's including the Chroma parent company and the -- as for the automation equipment. And for the Chroma NMC, which is the special material business. And I would like to highlight to you the Chroma NMC new material corporation will be terminated at the end of March of the first quarter. So after the first quarter, you won't see the top line including this portion of the business.

And then I would like to highlight to you of the quarterly numbers for the parent company. The sales revenue for the fourth quarter of Chroma parent company, approximately TWD 2,419 million. It's down by 13% Q-over-Q and flat to last year's fourth quarter.

The gross margin was still maintaining our expectation around 52%. And the operating margin is 18%, which is a little bit lower than the average. I think the major reason is for the exceptional expenditure for our investment in the Chroma Foundation and plus the -- we have been inspired by the exempt of the property tax for the fourth quarter of 2021. So these 2 can be deducted from the fourth quarter. And if we want to make the average kind of quarterly spending, I think the second quarter to third quarter will be an average kind of OpEx.

And considering the -- to the OpEx for the consolidated numbers, we will look at the write-off for the bad debt around approximately TWD 250 million for the bad debt write-off for the MAS operations. And net income for the fourth quarter is approximately TWD 658 million. This is 17% down compared to last quarter and 4% decrease compared to last year's fourth quarter.

And for the fourth quarter highlights, I think the major growth in fourth quarter contributed from the semiconductor and photonics sectors, which represent a growth of 20% on a year-over-year basis. And you can reference to the page 18 for the breakdown for the consolidated product mix. As to the guideline for the 2022 this year, well, in 2021, our total consolidated sales revenue, which is somewhere around TWD 17.6 billion, and this is a record high -- this presented a growth of 13% on a year-over-year base.

And in the parent company, sales revenue also hit record high. So we kind of hit a double record high, either for the consolidated numbers and also for the stand-alone parent company top line reached at the TWD 10.4 billion. This is quite as we expected and presented a growth of 12% on a year-over-year basis. And this is mainly contributed from the semiconductor and photonic testing solutions, which is at end of the fourth quarter, and this was increased by 19% compared to year 2021.

And for the 2022, our outlook will be -- we assume the strong growth of semiconductor and photonics testing solutions will be driven by a strong demand of development of 5G-related and high-performance chips, which is HPC applications as well as the new XL and auto LiDAR capacity ramp. And those key product drivers are for like the high performance, high reliability testing solutions and burn-in test and SLT test with thermal control. And for the CMOS image sensor and the VCSEL and the ToF testing solutions.

Third one will be the wireless RF high frequency testing solutions. And the turnkey solutions will be back to peak sales revenue level contributed by a mega trend of EV industry, especially for those battery formation.

And for the Test Instruments & ATS for power testing solutions continue to benefit from green energy, those products including EV, energy storage related components, battery cell, battery module, battery pack and smart-grid and 5G and server-related power testing. So those are the guidelines for the '22, it seems to us.

Okay. Now it's time for the Q&A.

[Operator]

[Operator Instructions] Our first question is coming from Gina Kim from Schroders.

[Gina Kim, analyst]

Can you elaborate a little bit on the Chroma Foundation and the property tax you mentioned, roughly how much of the fourth quarter OpEx was due to this?

[Paul Ying, executive]

The combining will be somewhere around TWD 60 million to TWD 70 million, and those including around TWD 30-some million for the foundation. That will be onetime expense, and that will be a donation to set up the foundation. That's the first initial setup. Rest will…

[Gina Kim, analyst]

Will you be contributing more throughout the years?

[Jennifer Chieng, executive]

You mean this year?

[Gina Kim, analyst]

No. Well, yes, 2022 onwards.

[Paul Ying, executive]

2022 onwards won't be that big. This is for the initial set up for the [ first ] foundation that set up the -- for the foundation set up. And in the future, we approximately will be less than this kind of initial set up. So ideally, that will be in millions only in NT dollars, which is set up in the budget.

[Operator]

[Operator Instructions] The next question is coming from Jeff Ohlweiler from Macquarie.

[Jeffrey Ohlweiler, analyst]

Can you maybe discuss a little bit the semiconductor testing equipment, you talked about 20% revenue growth over the last couple of years and essentially achieved it. Can you talk about this year or next year? Is that target still in place? Is there upsides? Is it going to be difficult to meet? Just some thoughts on semiconductor?

[Jennifer Chieng, executive]

You mean the long-term growth target for semiconductor...

[Jeffrey Ohlweiler, analyst]

Well, let’s say, this year, maybe question A; question B, next year; question C, 5 years...

[Jennifer Chieng, executive]

Well, semiconductor, I think last year was -- I mean we have seen continued growth like between 20% to 30%. And this year definitely will be a good year for the semiconductor and photonics sectors. And yes, based on -- okay, just based on our current work on hand, I think we do have a confidence level to grow similar growth or even better for this year, yes. But we continue to increase the new customers not only related to fabless and OSAT, but also include the foundry as one of our target customers for the semiconductor surplus. So I believe, yes, we actually target the decent growth every year for these sectors.

[Jeffrey Ohlweiler, analyst]

And maybe can you talk a little bit about the overall SLT market? How big is that market? And how fast do you think that overall market is growing?

[Jennifer Chieng, executive]

Well, I would say you probably heard that back to a year ago, back 2020, we have ever mentioned that with the first year, the SLT system-level tester has been stacking for the HPC products. And actually, last year, sales grew quite many times, okay, even very strong growth. But this year, I think you could expect quite a significant growth versus 2020. Well, not to talk about the later we're going to receive the order from coming quarters, but just year-to-date, our order on hand already are being [ at least ] the numbers we had back to 2020. So we believe this year, the HPC market is definitely been strong, is quite a strong year.

[Jeffrey Ohlweiler, analyst]

And one follow-up. Can you talk a little bit about the competition in that SLT market? And do you think you can outgrow the market? And how do you assess that?

[Jennifer Chieng, executive]

Okay. For semiconductors, especially SLT, we covered most of the fabless, and we also comment over each one before for these SLT tester currently mostly apply for SoC, which is SPC markets. And this type of chips are mostly customized content. And we actually elaborate a lot of R&Ds and a new firm customers design very customized. So we still play quite a big player for these HPC markets. But only a little bit -- another type of the application, which is also means SLT, which is the 5G mobile, and we have a little bit of exposure. So while we're still quite dominate and leading indicator for this SLT market at the moment, especially you can see in the past 5 years, we continue to acquire several I mean, at least 2 or 3 companies to furnish our content in SLT.

And another issue is, we probably mentioned in the last quarter that these SLT has been qualified by these foundry customers. So we believe the next adopters will definitely -- probably happen in the foundry industry.

[Operator]

The next question is coming from Jennifer Tsai from JPMorgan.

[Jerry Tsai, analyst]

First of all, I want to clarify that you mentioned that the OpEx is higher this quarter for the foundation and the expiry of the property tax. Can you elaborate a bit more about the property tax, or does it mean any that one-off expenses as well? And second question is about Turnkey, you mentioned it will be back to the peak level. So I'm wondering how long will it last, the strong growth? Like can we expect even stronger growth in the next, say, 2, 3 years or even longer?

[Jennifer Chieng, executive]

Which part of the growth?

[Jerry Tsai, analyst]

Turnkey for the back to peak level?

[Jennifer Chieng, executive]

Okay. I'll let the CFO to comment on this land tax issue first.

[Paul Ying, executive]

Well the land tax, well, easily well, make complicated things simple. It's just our new headquarters, I think we're being expired by the tax exempt for the land tax. And then it will be going back to the normal charging rates starting from 2021 and then moving forward.

[Jennifer Chieng, executive]

I think -- I think markets probably know that we moved to new headquarters. So even better, people look at the OpEx for 2022 to use a basis or referring to the basis from the 2021. Because in 2020, we're still located in the previous headquarters, maybe the depreciation rate and also some of the land tax with the -- there is the registration tax, which it will be very different than you -- if you compare new headquarter versus the old headquarters. So you can refer to 2021.

And regarding the Turnkey Solutions, okay, I want to add a little bit information on that. This year, I want to sort of recap on our previous meetings in the Chinese version. This year, due to -- we would like to further increase our capacity. So it sort of recall -- sort of elaborate all our resources, not only limited to tower manufacturing but also the China resources. And so this year, we got in order to increase our competitiveness, we have in the battery cell orders that delivered to China will be 100% in charge by Suzhou Chroma. And they will receive the order and assign to the -- direct assign to the max in China. So we can save the logistic costs and also the savings on the component costs. That is deliver or sourcing some of the cheapest components in China, okay?

And rest of the market, including United States and Japan, those capacity needs, I think the order will be 100% in charge by Taiwan. So I think both the Taiwan with the parent company Turnkey Solution will have a significant improved compared to last 2 years, 2021 and 2020. And consolidated-wise, we suggest to look at -- if you want to see the overall picture about the battery sale order we received for this year, you'll be better to look at the overall consolidated testing business because it will be Taiwan Turnkey plus Suzhou Chroma as a whole.

And last year, our consolidated sales reached record highs and now with TWD 17 billion. And we just combine [ with ] free consolidated entity. And this year, we do have a confidence level that our consolidated sales will not drop despite we are missing one of consolidated entity, which is New Material. So this year, only 2 consolidated entities are being -- able to maintain our consolidated sales versus last year.

[Jerry Tsai, analyst]

I'm sorry, just to clarify, for Suzhou Chroma, the order will be listed in overseas' revenue, did I get it right?

[Jennifer Chieng, executive]

Yes. Yes. [indiscernible] questions, yes.

[Operator]

The next question is coming from Jerry Su from Credit Suisse.

[Jerry Su, analyst]

Just want to follow up, given that you have a pretty good visibility for semi and also Turnkey, I'm just wondering how should we think about the seasonality based on your current order [on hand or] visibility for your Q1, particularly for Turnkey, as you expect revenue to go back to the previous peak level. So which quarter do you think we should -- we will see a more meaningful revenue boost from this segment?

[Jennifer Chieng, executive]

Right on first quarter.

[Jerry Su, analyst]

So starting about this quarter, we'll see a boost in Turnkey?

[Jennifer Chieng, executive]

Actually, we already booked some in the fourth quarter. Because yes -- maybe we are not start to deliver but in -- for the China area, if you receive down payments, you need to issue invoices. So you could say right on this quarter. Well, you need to look at it as a consolidated as a whole.

[Jerry Su, analyst]

So for your revenue booking, if you receive the down payment, you can start to book the revenue.

[Jennifer Chieng, executive]

Yes, based on the China regulation.

[Jerry Su, analyst]

So for...

[Jennifer Chieng, executive]

So you will not see it from the balance sheet because it's already turned into revenue. And then we will put the assumption sort of the cost of goods sold for this project.

[Jerry Su, analyst]

So which means that the first quarter this year should be a pretty strong quarter, even though shorter working days traditional seasonality.

[Jennifer Chieng, executive]

I couldn't say February there is no impact, but we will have some in the February too. Yes.

[Operator]

[Operator Instructions] The next question is coming from [ John Chang, Wellington Management ].

[Unknown Analyst]

Could you talk about -- a bit about how you see expenses trending going forward because both on the R&D and SG&A, right, you're experiencing quite a bit of inflationary pressure from the wages much more than you would -- had expected 2 or 3 quarters ago. So do you expect this pace of increase to go into 2022 as well?

[Jennifer Chieng, executive]

Can I just recap your question? So you mean the OpEx part, right? Overall.

[Unknown Analyst]

Yes. OpEx. Yes.

[Jennifer Chieng, executive]

And what sort of growth rate we are looking for, right? This is your question?

[Unknown Analyst]

Yes. I think on year-on-year right now, it's at little over 20%. So I'm just wondering how long we should expect that.

[Paul Ying, executive]

Well, Jennifer just explained that since we moved to the new headquarters, I think we have seen some changes in the OpEx. But eventually, I think 2021 will be a very good reference. If you compare to our past experience on the growth of the OpEx, definitely, it will be -- well, if we grow top line, I think the growth rate of the OpEx will be -- tend to be more flexible than the top line growth. This year, we see some of the changes due to the restructuring for the salary adjustment plus the depreciation for the new headquarters. We see some growth, which is higher than the historic growth rate. But if you look at the second quarter to third quarter, I think that core OpEx would be kind of like a swap to an annual base. Fourth quarter will be a typical quarter that we have some exceptional expenditures such as the donation to the foundations and also the land tax. But outside of that, I think the growth rate will be not that material.

[Unknown Analyst]

Are you finding it sort of any pressure to raise region R&D and production levels up?

[Jennifer Chieng, executive]

You mean raise or...

[Unknown Analyst]

Yes, like raising their salaries to try and can keep retentions higher.

[Jennifer Chieng, executive]

Every year we raise the salary package according to CPI. This is basis. But because Taiwan right now is under sort of labor shortage, especially for those qualified R&D people. So yes, I think this is the part we [indiscernible] and then probably give a little bit more than CPI rate.

[Operator]

The next question is coming from Gina Kim, Schroders.

[Gina Kim, analyst]

Just one follow-up question. So at the parent level, I'm just looking at your sales. Is the Q-o-Q sort of decline more to do with seasonality? Or were there some exceptions like shipping issues, logistics issues at your client end?

[Jennifer Chieng, executive]

Yes, mostly to deal with businesses [indiscernible] due to the fourth quarter. And I couldn't deny that last year, I think the whole year will have this kind of short and long lead time raw material issue. So it's very hard to for us to really forecast which -- what the [indiscernible] pattern look like but fourth quarter, I think, definitely have some infrastructure [indiscernible].

[Operator]

The next question is coming from Jeffrey Ohlweiler from Macquarie.

[Jeffrey Ohlweiler, analyst]

So a question on Turnkey. So you mentioned that this year, you'll see Turnkey go back to kind of peak revenues, which was in 2015. I mean, the EV market has been growing pretty steadily since over the last 8, even 10 years. So what happened in the last 5 years that caused things to decline? And what's happening now that's going to cause them to come back up? And how sustainable is that going forward?

[Jennifer Chieng, executive]

Okay. Well, if you look at the past 5 years, I mean the battery, I mean, specifically EV battery cell industry. I think the last CapEx cycle was mainly due to China's increase quite with the increased EV exposure. But we do have a chance to participate in the first 2 years. And but mostly at that time, the first phase, they mostly manufacturing for European car with a better margin. And later in a few years because we are very cautious about the margins. And at that time, I think China mostly support the local cost.

So I think we take very selective for the project we deal with. So as you may notice in the past 3 years, our -- most of our Turnkey Solutions are dealing out of China, like Thailand or other projects yes. But this time, we -- from last year, we keep saying that we see this time the EV CapEx cycle changes from global market instead of just one region. So we see this battery cell demand is now limited. Of course, today, you see from the China, China is very -- got a very strong demand. That's because a European car outside of the -- a lot of capacity to them.

And -- but we also received order outside of China. So that's why we believe this CapEx cycle change would take longer than last time because currently, I think battery sales still under severe shortage. And a lot of -- especially this year is a turning point that Europe -- European cars would like to take over and would have an ambition to increase their market share in the EV industry.

[Jeffrey Ohlweiler, analyst]

Okay. And does that mean that the China projects have good margins as well?

[Jennifer Chieng, executive]

You can say that most of the projects are dealing with European car because I think, okay, some of the key European cars, they say, okay, they wanted to have a battery cell capacity build in Europe. But look at the demand, also taking the market share. If you want to start everything from this year, then that would be too late to have factories in China -- in Europe and start to ramp up capacity.

So the easier -- the [ easy assess ] part is just ask -- direct it from -- take it from the China market. So that's why China has been built up on several phases, our largest -- you could say largest sales is for European cars. Still, we are doing very much related to local cost. So if you look at that the top 5 China battery cell makers I think those ones will deal with a lot of foreign cars typically our customers.

[Jeffrey Ohlweiler, analyst]

And maybe one more question. You mentioned -- so you're closing CNMC, which was about 16% of sales last year. So maybe take away about 15% of sales this year, and you're still going to at least be pretty close to flattish year-on-year for sales, which is very good. But seeing CNMC was a very low-margin business. Can you talk about what the impact is on margins this year? And where can they go? And on flat sales, I imagine you could still have some pretty good EPS growth.

[Jennifer Chieng, executive]

Well, I have done a little bit in your calculation for our last 2 years. If we take out the new material business, what would be the consolidated gross margin looks like. I think we're able to comment is better than parent company.

[Operator]

[Operator Instructions] The next question is coming from Jerry Su, Credit Suisse.

[Jerry Su, analyst]

Just a quick follow-up on the fourth quarter's parent business. I think that we see -- besides the Turnkey semiconductor and also the ATS is another category which is service and others, that one saw a pretty big decline in the fourth quarter. Any particular reason? And how should we think about this for 2022?

[Jennifer Chieng, executive]

You meant servers and others?

[Jerry Su, analyst]

Yes. I think in the past quarter, they had been like TWD 200 million, TWD 300 million per quarter, but 4Q has dropped to TWD 36 million.

[Jennifer Chieng, executive]

I think we don't have a specific reason for this, but just this -- I think in fourth quarter, we sold -- we didn't sell that much about those consumable parts. I mean in the fourth quarter.

[Jerry Su, analyst]

But for this year, should we be thinking that they could be going -- start to improve and then go back to the previous -- that kind of run rate?

[Jennifer Chieng, executive]

I think these 2 years as far as the 3 months maintained around TWD 800 million. I think it's already quite a big jump versus years ago around TWD 500 million, TWD 600 million. So that's already indicated, we start to have selling those consumable parts according to semiconductor testers sales increase.

[Operator]

[Operator Instructions] As there is no questions. Now I will hand it over to CFO, Paul Ying, for closing remarks. Mr. Ying, please proceed.

[Paul Ying, executive]

Thank you. Thanks for joining this earnings conference call for 2021 fourth quarter of Chroma. And it seems to us that the 2021, we have very good years, and we are looking forward to see the 2022 with a very good start on the first quarter. So thanks for your support, as always, and bye-bye.

[Operator]

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.