Chroma ATE Inc

TWSE:2360

Earnings Call Transcript 2022-Q4

[Operator]

Welcome, everyone, to Chroma's 2022 Q4 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 under the Investors section.

I would like to introduce CFO, Paul Ying. Paul, you may begin.

[Paul Ying, executive]

Thank you. This is Paul. Welcome, everyone. Well, this is the Chroma 2022 earnings release, and we just finished the Board meeting this morning. So yes, I see the participants today right now is from nearly everywhere from local Taiwan, from United States and also the U.K. So yes, good morning, and good afternoon.

Well, let's go through the presentation part. On the first page, which is the corporate profile, you can easily see from this page, the -- after the record-breaking high of the sales revenue at the 2021, we made another record high on the top line at the year 2022 reaching TWD 22 billion, which is mostly contributed from the test and measurement, our core business.

And with the termination of the representation for the material business, after the first quarter of 2022, you will see the percentage of the special material reduced to only occupy like 3% of the consolidated sales revenue.

And here, the net income for 2022 is another record high, which is reaching TWD 5.1 billion. And the total head count for the Chroma until December of 2022 is 3,379 employees.

And as to the gross margin on the next page, you also can see that the performance for the consolidated gross margin, reaching 50-something, which is 52% compared to last year is also another growth. I think that's mainly because the low-margin proportion of the sales revenue contributed from the noncore business-like special material reduced to only 3%.

And as to the parent company, you also can see from the right-hand side of the slide, for the bar chart of the 5-year comparison for the parent company sales revenue. Also it's breaking the record from the 2019 all the way through 2022, which is break up the TWD 10 billion, at year 2021, and for the year 2022, it's reaching TWD 13.4 billion.

And the gross margin still maintained on our expected range, which is over 50%. And for the investment to the R&D expenses still growing. But due to the growth on the top line faster than the growth of the investment in the R&D expenses, so the occupancy for this section is 12%.

And on the next page, you can see that for the return on equity, is 25%, a little bit improved last year. And for the dividend, this is another record high, which is well, at the TWD 12.14. And after the Board meeting resolution this morning, we are going to provide TWD 8 as the dividend for this year.

Well, if we go to the parent company, for those numbers for the -- well, let's see the Slide #10 for the consolidated income statement. I think roughly, it's just kind of like the illustration of what I just mentioned before, which is the total sales number is TWD 22 billion, and this is a 25% growth on a year-over-year basis.

And with the consolidated sales of the testing equipment for this business is reaching TWD 20.2 billion. And compared to last year, it's a 50% growth. I think mainly our top line is growth from these sectors.

And for the gross margin, again, is reaching TWD 11.3 billion, which the gross margin ratio is 52% compared to the last year. It's a 34% growth.

As to the operating income, you can see that it's over TWD 5 billion, and 23% of the top line and compared to last year, it's a 64% growth. And to the net income, again, it's reaching TWD 5.2 billion, which is occupied like 24% of the top line. And compared to last year, it's a 21% growth. And overall, the EPS reached TWD 12.14 as the EPS.

Well, if we go to see the -- for the fourth quarter of those consolidated income statement, you can see from this page that again, I think the fourth quarter of 2022. The consolidated net sales is somewhere like TWD 6 billion compared to last quarter, it's a 9% drop, but compared to last year, it's a 32% growth. And again, it's mainly contributed from the consolidated sales of the testing equipment business, which is reaching TWD 5.8 billion compared to last quarter. Again, it's an 8% drop, but compared to last year, it's a 64% growth.

So that brings us to the gross margin on the fourth quarter of the consolidated business, the whole income statement TWD 2.7 billion, is up 46% compared to the gross margin. And compared to last quarter, it's a 21% drop, but compared to last year, it's a 30% growth.

And for the operating income, although we're still growing the -- the OpEx still growing along with the growth on the top line, but our operating income for the fourth quarter is a little bit over TWD 1 billion, reaching 17% to the top line, compared to last quarter, it's a 41% drop, but compared to last year, it's a 44% growth.

For the income -- net income for the fourth quarter is TWD 914 million, which is 15% of the top line, and compared to last quarter, it's a 48% drop, but compared to the last year, it's a 28% growth.

For the fourth quarter, our EPS is well reaching at TWD 2.05, compared to the year last quarter, again, this is a 50% drop. But compared to last year, it's a 31% growth.

And for the balance sheet items, you can see from here that the cash and inventory a little bit is growing. It's -- but for the debt, I think it's decreasing. And for the turnover days for the accounts receivable is improving. Again, inventory turnover is pretty much along with the average, and return on equity and return on assets, I think it's a little bit improving compared to last year.

And for the EBITDA of 2022 is somewhere like TWD 7.1 billion, and free cash flow is somewhere like TWD 6.2 billion. And as to the parent company, our fourth quarter highlights is somewhere that the sales revenue is TWD 2.7 billion. And if you look at the bar chart for the 8 quarters of recently, you can see that 2022, we fall into the seasonal -- as our normal operations.

So the fourth quarter will be a little bit down to the third quarter, and -- this is down 35% on a Q-over-Q basis. But compared to last year, it's a 12% growth on the Y-o-Y base. So the gross margin, we still maintain somewhere like 54%, operating margin, 17%.

Our net income for the parent company, reaching somewhere like TWD 863 million, which is 50% down on a Q-over-Q basis. But on the Y-o-Y base, this is a 31% growth. While the fourth quarter sales revenue were mainly contributed from the test and instrument and ATS. This represented a 24% growth.

As to the parent company net sales, you can look at the Slide #14. The top line we're reaching at the TWD 13.4 billion compared to last year, a little bit over TWD 10 billion, we have a 31% growth on a year-over-year basis. Gross margin reaching somewhere nearly TWD 7 billion, which is 52% in average. But compared to last year, this is a 29% growth.

The operating income is somewhere like TWD 3.3 billion, and this is 25% compared to the top line. But compared to last year, this is a 37% growth. And the nonoperating items here, we're reaching TWD 2.5 billion compared to last year, it's a 2% growth. But I have to remind you that last year, we have enjoyed a capital gain from sale of the our Hwa Ya headquarters, which is reaching somewhere like TWD 1.5 billion as the nonoperating income.

So without that, we still have a very good contribution from all the subsidiaries' achievements. So in there, you also can see that 2022, our net income for the parent company is TWD 5.1 billion and somewhere like 38% on the top line. But compared to last year, this is a 22% growth and reaching the EPS on TWD 12.14.

Well, as to the financial ratios and highlights for the balance sheet, you also can see that the -- the cash items is improving. And inventory, we have a little bit of growth compared to the 2021. You can see that those situations for those supply chains.

But again, I think this also reviews that we still have a very good order on hand. But compared to the inventory turnover, we have a little bit of improvement compared to last year. And accounts receivable turnover days is also improving. ROE is somewhere like 26% and our return on assets is 19%. And I think both sectors have very good improvement. So again, for the EBITDA, it's somewhere like TWD 6.3 billion, and free cash flow is somewhere like TWD 4.9 billion.

Well, as to the 2023 -- well, let me give you some highlights for the -- for the breakdown for the product mix and consolidated sales numbers. You can see from here that the -- on the fourth quarter, for the core business of test instrument and automatic testing systems. Fourth quarter is somewhere like TWD 1.8 billion and compared to last quarter, on a Q-over-Q basis comparison is a 9% drop. But on a year-over-year basis, it's 24%. But as a whole, for the 2022 we are reaching somewhere like TWD 7 billion, and this is a 27% growth on a year-over-year basis.

And semiconductor and photonics testing solutions sectors, you can see from this page that fourth quarter reaching TWD 541 billion Q-over-Q, this is a 67% drop and 34% drop on a year-over-year base. But you also can see this is the effect for those semiconductor industries kind of facing a very strong headwind starting from second half of 2022.

But on a whole basis, you also can see that even for that, I think, for us, we're reaching like TWD 4.5 billion, and this is a 26% growth on a year-over-year basis, which pretty much comply with our commitment at the first or second quarter at 2022.

The turnkey solutions here, I think for the single quarter or fourth quarter, it's reaching somewhere like TWD 65 million. And this is a 10% growth on a Q-over-Q basis, but -- on 13% drop on year-over-year basis. And for the whole year of 2022, we are reaching somewhere like TWD 578 million, and this is a 67% growth.

And this is for the total parent company sales. But if you look at down to -- so if you look down to see the [ CDS ] sales from overseas operations, these subsidiaries' contributions at the fourth quarter alone is TWD 3.1 billion, compared to on a Q-over-Q basis, is 43% growth and year-over-year, it's doubling the size to reaching the whole year -- the total whole year number is TWD 6.8 billion, and this is double the size at year 2021.

Mainly, I think a major part of that will be the for mentioned turnkey solutions we installed at the China site. And here, the total consolidated testing equipment business reaching -- at the fourth quarter, reaching somewhere like TWD 5.8 billion. Again, this is an 8% drop on a Q-over-Q basis, but a 64% growth on a year-over-year basis. And for the 2022 total, we are reaching, again, somewhere like TWD 20 billion, and this is a 50% growth compared to 2021.

For the consolidated sales, well, again, this is TWD 6 billion and a 9% drop on a Q-over-Q basis, and 55% growth on a year-over-year basis for the total year of 2021, we have reached somewhere like TWD 21.4 billion, and it's a 45% growth. And again, for the new material, this is the last time that we're going to see this consolidated business, and it will be discontinued and terminated starting from this year.

Well, for the -- for this year 2023, I think in last year, we have a total consolidated sales revenue hit on the record high, reaching TWD 22 billion. This is a growth of 25% on a year-over-year basis. And the testing equipment business was the major growth driver. This represent a growth on the 50%, the parent company sales also we hit a record high and reaching at the TWD 13.5 billion.

And consecutively, this is the second year of the double-digit growth, increasing 31% on a year-over-year basis, and this is mainly contributed from the EV and the HPC and the semiconductor industry. As to the 2023 outlook, we presume that the EV industry remains strong. The EV battery sales projects still will be the major contributions in the 2023. And the second one would be the testing instrument of ATS for the power testing solution will be continued benefit from green energy industry, including EV and energy storage-related components, battery cell, battery modules and battery pack and micro-grid related power testing.

And the third point -- bullet point will be our view to the -- will be a bit of a conservative on the semiconductor and photonics sectors. We expect demand to pick up probably will be in the second half.

Well, that is my presentation and any questions?

[Operator]

[Operator Instructions] And our first question comes from Jeff Ohlweiler with Macquarie.

[Jeffrey Ohlweiler, analyst]

Quick question for me. The consolidated gross profit margin LTM was down a lot Q-on-Q in fourth quarter. Can you just talk a little bit about that in a little more detail, please?

[Jennifer Chieng, executive]

Basically, equipment company is kind of operating leverage. So it depends on the gross margins and also the -- I mean the sales momentum. And in the fourth quarter, our biggest delivery, as you may compare the consolidated numbers, our major deliveries, mostly related to EV battery cells.

Yes, we sort of mentioned about this before that EV battery cell project doesn't come with the gross margins in line with the corporate average. So I think the basic explain the gross margin structure in the fourth quarter, I would say the product mix difference, but however, we will try to make up the whole year gross margin in the range of 50% to 55%.

But every quarter, we probably change. I mean the shipment or product mix will be different in each quarter.

[Jeffrey Ohlweiler, analyst]

Okay. Great. And a follow-up. So for the EV formation systems, what's your outlook for this year? Obviously, you had a very strong year last year. What's the outlook for this year, or maybe even the next couple of years?

[Jennifer Chieng, executive]

Well, honestly, EVs become a global trend. So we do have a quite -- I think -- if I want to highlight one factor, which is have better order visibility, I would definitely highlight EV and of course, the EV battery cell, okay? These 2 years 2022 and 2023, we have been quite good benefit by this kind of EV trends, especially highlight for EV battery cell. And these 2 years mostly contributed by Europe OEM placing order to China.

So last year -- concluded last year, we sort of, I think, in total, including Taiwan shipment, I think last year, we delivered about 3.5 billion EV battery cell. A majority is definitely comes from the European OEM place order to China. And this year, we -- this year, we think we were having similar levels last year. But if you say the guarantee with the down pay, I would say, almost close to larger level. This is a year-to-date basis regarding EV battery cell.

And follow-up, we do have a visibility for 2024 and 2025. I think that will be mainly contributed by U.S. and Japan markets. I think that all depends on factors from IR. So this is a visibility for EV battery cell projects.

And regarding to the components and module parts, I mean, the devices such as the power module, battery pack. And we also have a quite good order visibility. I think this part of the business could have about 4, 9 months -- still have about 4, 5 months order visibility. This is quite delay of conclude orders.

But I think the driver besides the EV, the other sectors, we see the picking out of high potential market. I will highlight to ESS Energy Storage System. Yes. So we do have a confidence level regarding to our power testing. I think going to our drop like highlight this kind of 2023 guidance, I think we tend to be more conservative on these semiconductor sectors.

I think it's number one because semiconductor, photonic sectors that has had consecutive growth in average every year for 4 years, our growth is around 25%. So which is mean after 4 years, our -- today our semiconductor sector is already doubling versus 4 years ago. So we need to grow from high basis.

And based on today, the semiconductor sentiment, yes, we do have an order on hand regarding to HPC. As you may notice, first 2 months there's a quite public topics to talk about ChatGPT. That actually utilize more than, I would say, according to our customers' feedback about 225,000 ADLINK's, the NVIDIA's chips.

So I think including our customers, they do have a confidence level that things will start to get better for second half, but based on current order on hand, we still have momentum from the SLT orders. And we also have a couple of drivers like foundry customers and Micro LED, but we do have a concern regarding to the China market of semiconductor development, especially under these kind of a geopolitical factors.

And we also pretty much not for sure about what the market thinks about reopen of China markets. Whether it really -- we still doubled out whether it will back to the where it looked like before the pandemic, not so sure. So we take more consumptive view regarding to ATE system.

[Jeffrey Ohlweiler, analyst]

Okay. Maybe last question. So do you think consolidated revenues can grow this year?

[Jennifer Chieng, executive]

Yes. Going through our guidance, our proposal, of course, we expect this -- I mean, overall consolidate to growth, but definitely not another yield of 50%. Yes.

[Operator]

Our next question comes from Harry Anderson of Mondrian.

[Harry Anderson, analyst]

I just wanted to ask a bit more details about the sales from overseas line. It's now quite a significant part of the testing business. Can we have a few more details around the projects that, that revenue has come from? Maybe visibility of those revenues into 2023, and kind of your outlook for that line?

[Jennifer Chieng, executive]

All right, you mean SLT, right?

[Harry Anderson, analyst]

No, the sales from overseas portion of the consolidated business?

[Jennifer Chieng, executive]

All right. Last year, we generated about TWD 6.8 billion and about TWD 3 billion, that's related to battery cell. We just mean those TWD 3 billion battery cell was China projects, and which is a assembling -- reassembling in China.

[Harry Anderson, analyst]

Is that an ongoing project? Is that -- or is that just a project that was executed on -- in 2022?

[Jennifer Chieng, executive]

2022? No. 2022, yes TWD 3 billion. You mean 2023, right?

[Harry Anderson, analyst]

The year just passed. You said it was TWD 6.8 billion, TWD 3 billion of which was from battery cell formation in China. Is that project a multiyear project? Or was it just in 2022?

[Jennifer Chieng, executive]

Well, that's -- the battery cell project we booked. But -- normally battery cell come with the -- okay, that was accumulated by multiple projects, not one project. So every project cut pickup at different times. So we have a sort of...

[Paul Ying, executive]

That's a based installation.

[Jennifer Chieng, executive]

Different booking.

[Paul Ying, executive]

Yes.

[Jennifer Chieng, executive]

Yes.

[Paul Ying, executive]

So we'll be booking period will be a bit of that difference.

[Jennifer Chieng, executive]

Yes. So it's not still -- this is -- anyway, that's not a onetime project. But if you ask how many deals that we booked last year, that's around TWD 3 billion. But if I refer to our balance sheet, we still have like customers down pay about TWD 1.6 billion, which is mean we still have several projects on hand.

[Harry Anderson, analyst]

And so then maybe some guidance on your expectations for that line into 2023? And then maybe a commentary on your broader revenue exposure to China. You mentioned kind of sales in the SLT business there. Kind of what's your overall exposure to China.

[Jennifer Chieng, executive]

Well, if you say -- because we indeed say most of the EV components like EV battery cell even, okay, we make the EV -- okay, the capacity we're dealing with Europe is 100 -- almost 100% European OEM. But they're still manufacturing in those capacity due to high energy costs in Europe, those capacity is still built up in China.

So I would say today, we still have about 50% exposure to China. But we don't sell any of the SLT to China because SLT is HPC, currently, China couldn't due to the trade war, they couldn't develop HPC at the moment. So if you talk about SLT, system level tester mostly sell to U.S. customers.

[Harry Anderson, analyst]

Okay. So the exposure to -- on the EV side from manufacturing in China?

[Jennifer Chieng, executive]

Yes, it's the customers in China, yes.

[Harry Anderson, analyst]

Okay. So then maybe lastly, kind of the outlook for the sales from overseas line next year. So the contribution of that line in 2022 as a percentage of the parent jumped quite significantly from around 23%, 24% to 34%. Do you expect that to go back to normal? Or is this kind of higher contributions from overseas?

[Jennifer Chieng, executive]

We're going to be very sure at today, okay. Okay. If you say China projects, we probably tend to prefer to assembling in China. But rest of the area like Southeast Asia, currently, we do have a couple of projects in Southeast Asia. U.S. and Japan will be booked under parents because it will be shipped from outside of Taiwan, not China.

But if you say the total project that we're going to book for the EV battery cells. Currently, we still expect this kind of EV battery cell to be better than last year, which is around 3 billion.

[Operator]

[Operator Instructions] And we do have a follow-up question from Harry with Mondrian.

[Harry Anderson, analyst]

Yes. Maybe a few more details around the SLT business. You mentioned conservatism in the first half of the year. What does that mean for kind of your overall expectations? Obviously, you've grown very strongly for the last 4 years. Does that mean maybe negative growth next year?

[Jennifer Chieng, executive]

Okay. Maybe I recap a little bit, okay. Basically, Chroma, we only sell 3 major testers for semiconductor industry. Our #1 SLT system level testers, selling to U.S. HPC makers, like NVIDIA and, I think we covered most of them, including MediaTek, Realtek, et cetera, okay?

Second part is ATE systems. ATE mostly sell to legacy applications like MCU, power IC, but only to China. We sort of have about over 90% market share. Because this is very legacy, about 300 or 400 megahertz, okay?

And number 3 is related to optical often, like VCSEL or recently, we are stepping to Micro LED, those are optical options. So none of them is actually under the so-called restriction under trade war, okay?

But we just mentioned about the conservative as we concerned about this time China market. So which is the ATE system. Because ATE system, we all understood -- we also remember back to 2021, ATE system was -- have a very strong demand for this kind of legacy applications.

In 2022, most of the people start to decline, but China still purchased quite a lot last year. Okay. So recently, the market start to talk about like China reopened, the consumer demand back to normal, et cetera. But we take more conservative view on this part because since China doesn't really slow down even last year regarding to this kind of ATE purchase.

But maybe there are multiple reasons behind. So if ATE starts to decline, that mean the other factors need to cover the ATE decline even, okay, as I said, we still look for the second half we will start to get better because our customers, especially for HPC maker, recently people talk about ChatGBT, and they still kind of quite positive regarding to the kind of HPC demand picking up in the second half of this year.

[Harry Anderson, analyst]

Okay. So in terms of your overall outlook for 2023, I'm kind of your -- is it fair to say that you expect growth, but you're conservative around the number that you can forecast?

[Jennifer Chieng, executive]

Okay. We probably -- according to regulation, we are not really able to give overall the company sales revenue or net profit guidance. But as we address for EV with power testing, we still expect -- expected to grow. But semiconductors, maybe be flat to decline for current sentiment and see whether the second half will be -- how much it will pick up.

[Operator]

[Operator Instructions] And our next question comes from Paul Rosen with Schroders.

[Unknown Analyst]

Just on your association with Camtek, I'm wondering if there's any opportunities you're seeing from licensing their technology, creating any synergies from their metrology solutions?

[Paul Ying, executive]

Well, Paul, yes, of course. But I think due to the corona separation for 3 years, I think we got the first visit from Camtek is their Chairman and the CEO. So we do have some technology changing and video conference. But actually, the physical kind of corporations is only. Well, probably postponed for a period of time.

But again, I think we've got a couple of projects are working on. And I think they do a very good business for the past 3 years already. So I think that's still maintained in very good shape.

[Unknown Analyst]

Yes. I mean I agree that it's been difficult for the last few years to do much. But do you see that changing? Is it enough to move the needle in the next few years?

[Paul Ying, executive]

Cannot speak for them. But again, I think the -- we are more diversified than Camtek. So Camtek will be a bit of focus and for the operation for this year, I think it's a bit of conservative, I would say, just like we -- our views to the semiconductor business.

[Unknown Analyst]

Okay. And you mentioned Micro LED is potentially an area that you see opportunity, can you give us more on that?

[Jennifer Chieng, executive]

Paul, this is Jennifer. Actually, we do have, the reason why we highlight for Micro LED's because we already have order on hand, but certainly both [ AI MR ] projects, they normally would not have a big volume in the first year.

And we actually expect from the second half because customers are already pretty much confirmed, which is the OEM, who's going to entrench for manufacturing this Micro LED. So that's why we do have equipment orders.

But we start this one because since already 2 U.S. customers will got Micro LED for their [ AR MR ] projects. So we start in this kind of application will start to pick up in the second half.

But first half, just probably we just run our project on hand.

[Unknown Analyst]

Yes. Got it. All right. That's it for me.

[Operator]

[Operator Instructions] There are currently no questions.

[Paul Ying, executive]

Thank you. Hi, everyone. I think we have enjoyed a record high either on the top line, on a consolidated basis or on the parent company stand-alone numbers on either top line and the bottom line. I think we have a very good year for the past 2 years.

But again, we are working very hard in trying to maintain this kind of record at the 2023, and thanks for your confidence. And yes, please support as always. Thank you. Thanks for your time. Bye-bye.

[Operator]

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