Nanya Technology Corp
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Nanya Technology Corp
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[Foreign Language] Welcome to Nanya Technology's Second Quarter 2019 Earnings Conference and Conference Call. [Operator Instructions] As this conference is being viewed by investors around the world, we will conduct this event in English only. Today's format will be as follows. First, Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the second quarter of 2019, followed by our guidance for the third quarter of 2019 and key messages. Afterwards, Nanya Technology's Vice President, Mr. Joseph Wu; and Financial Executive, Mr. Philip Jao, will join us as we open our question-and-answer sessions, both online and on floor. And today's conference will be approximately 60 minutes. For those online participants, if you do not yet have a copy of today's earnings conference presentation slides, you may download them from Nanya Technology's website at www.nanya.com. As usual, we would like to remind everyone that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our presentation slides. And now I would like to turn the podium to Nanya Technology's President, Dr. Pei-Ing Lee, for summary of operations and current quarter guidance. Dr. Lee, please begin.
Thank you all for coming to Nanya Technology Q2 Investor Conference. As usual, on my talk, starting with our Q2 revenue and result, CapEx and bit shipment, and market outlook, and end it by business review and outlook. Our Q2 unaudited net sales comes to TWD 12.441 billion versus TWD 11.372 billion. It is a Q-to-Q improvement of 9.4%. And gross profit, TWD 4.348 billion versus TWD 4.633 billion, is a reduction of about 6%, okay? And the gross profit margin -- gross margin is running at around 34.9%. Operating income, TWD 2.8 billion, running at around 22.5% versus last quarter, 26.6%, okay, and this is a decrease of around 7%. EBITDA, TWD 6.427 billion versus TWD 6.381 billion. It's about similar, okay? Non-operating income, TWD 601 million versus TWD 567 million. It's quite similar, okay? Income tax expense. Okay. We pay income tax about TWD 658 million, okay? This is a little higher than last quarter. We don't have to pay any income. The reason is our accumulated loss carryforward has been reduced from TWD 125 billion, gradually down to 0 by April '19. Okay? So at this point, we started to pay tax. We no longer have accumulated loss to compensate, okay? So this is actually quite positive, okay? Actually, we are very proud to pay tax, as a matter of fact. Okay. Net income, TWD 2.749 billion is at 22.1%, okay, versus TWD 3.586 billion. And the difference mostly coming from the income tax that we pay, okay? If you look at income before tax, it's quite similar, okay? Earnings per share, TWD 0.9 per share versus TWD 1.18 per share. Book value came down to TWD 49, and this is after substracting -- we already deduct TWD 7.11 cash distribution from this number. So the key reason for coming down is our cash dividend distribution, which is scheduled for July. Okay? So in summary of the quarter revenue results, Q-to-Q, revenue up by 9.4%; year-to-year, down by 49%. Shipment increased by over 30%, which is a good positive sign that the demand in Q2 is far better than Q1. Okay? Compared to last year's, it decreased by teens. And for ASP, ASP continued to decline by about mid-teens, okay? For exchange rate, positive by 0.9%, okay? So the increasing in shipment largely compensate the ASP decline as a result of revenue went up by 9.4%. For comparison between Q2 and Q1 results, net sales, as described for the -- last for you, and this increase -- increasing mostly due to the bit shipment increasing by over 30% and ASP decreased by mid-teens, okay? Gross profit, TWD 4.948 billion (sic) [ TWD 4.348 billion ], 34.9% versus TWD 4.6 billion. And the gross profit decreased TWD 285 million mainly due to ASP drop, shipment increase that took these 2 factors here and also cost improvement, okay? Operating income, TWD 2.85 billion -- TWD 2.805 billion versus TWD 3.002 billion, came down by 4.1%. The OP income decreased TWD 214 million, okay? And the key reason is the gross profit came down by TWD 285 million, okay? SG&A increased by TWD 19 million and R&D decreased by TWD 89 million. Net income, TWD 2.745 billion -- TWD 2.749 billion versus TWD 3.586 billion, and this decrease is mostly due to income tax increase, okay, and some operating income increase here, okay? So that pretty much compares the Q2/Q1 result. But generally speaking, our gross profit is very similar with 5% down from first quarter with the market ASP down by mid-teens. Okay. Our quarterly financial highlights, okay, for the last few years, okay, the gross margin, 34.9%; and the OP margin, 22.5%. And with the net margin -- net profit, TWD 2.749 billion, okay? And overall speaking, this will really come down to very near our last 2 years record loss. SG&A expense, TWD 483 million, okay? Pretty much in the ballpark, okay? And R&D, okay, about TWD 1.059 billion, okay? And from this point up, basically from Q2 last year, we had tried to make quite a bit of R&D effort by investing more of our capacity as well as our -- some cash into R&D in this region included here, okay? Cash flow situation, that's our beginning balance, TWD 60.3 billion; and the cash from operating activity, TWD 853 million; and capital expenditure, TWD 1.827 billion; investment and others, TWD 714 million. End balance is about TWD 60.115 billion with free cash flow of negative TWD 973 million. And this number differences including the retained earnings tax of TWD 2.5 billion, okay? And some -- and the reason for this is -- I will start here, it's mainly for employees' exercise of ESOP contributing TWD 613 million, okay? Our interest-bearing debt had also come down to 0. We know there is no interest-bearing debt, okay, and with the -- around TWD 60 billion cash on hand. Next, CapEx. We estimate CapEx this year around TWD 7 billion, okay? First half CapEx is about TWD 3.5 billion. And for Q2, shipment-wise, we're seeing go by 30 -- more than 30%. Q3, we expect also mid-teens growth, okay, in bit shipments, okay? So overall speaking, this year, bit shipment, about single digits, okay, and we'll continue to allocate 5% to 10% capacity through technology and product development. For the market. First of all, the outlook of global macro economic uncertainty still continues, okay? This is including the trade conflicts among different countries, okay? And customer inventory, we've already seen that customer size inventory has been reduced, okay, which means that the customer is more enthusiastic in buying the product, okay, and that's already been described in our Q2 shipment increasing. And we're expecting that Q3, that the good opportunity of shipment will continue to increase, okay? However, our prior inventory remained high, okay? And we're expecting that the supply/demand will be gradually balanced, and that will depend on how this uncertainty and how this inventory comes soon. So we're still expecting the pricing will continue to decline, but hopefully, the percentage of decline will be reduced. Okay? Our sectors outlook is we're seeing the server demand improving, new smartphone models are launched. The hot season is coming, okay? And CPU supply, which has given negative impact to the commodity, particularly PC and notebook previously, and we are seeing that the price has been increasing. So hopefully, commodities market will resolve its potential. Consumer seasonality demand increasing. This consumer market is typical in Q3's high season for the year, yes, and this expectation continues. On the supply side, capital expenditure from the supplier, we've seen a favorable reduction and inventory adjustment continues, okay? And this again will very much depend on how the economic uncertainty behaves as well as how the inventory being consumed depend -- which would determine the price erosion degree. For the demand, mobile, new smartphone model launch, so content per box increased. 5G high-end phones, including 8 gigabytes, which will continue to drive some demand gradually, okay, we're seeing this will not be happening abruptly going very quickly, but it will start to kick in gradually, okay? We're already seeing that on the base station, there's a pretty good enthusiasm on base station. But for the end product on the mobile side, you need to have 5G gradually used in each of the country. For the PC, we've seen positive sign that CPU supply resumed normal, and we've also seen major brands introducing new models. Server side, we've seen the customer inventory decline. And we expect the bit shipment, bit demand recovery from Q3. And the bit demand grow -- anticipated to grow in long term, okay? It's still going to be a very important factor for DRAM growth momentum, okay? Many of the enterprise servers, development of AI, also including 5G and networking, this will continue to drive server demand. Consumer market on the set-top box, smart speaker, SSD, IP camera, we've seen the DRAM content continue to grow. And for as long as older electronic device want to become smarter, we expect in the consumer side, they will be using more DRAM in each of the device. For Nanya's business outlook and review. Our Q2 bit shipment improved across all segments. And in Q3, bit demand expected to be better than Q2. Second half DRAM supply/demand will gradually balance with price decline narrowing. We are scheduled to distribute cash dividend of TWD 21.7 billion, which is TWD 7.11 per common share, on July 26, 2019. We don't have any new CapEx planned for the second half this year. On top of that, we are allocating 5% to 10% capacity to technology and product development activities, okay? So with that, that pretty much concludes my presentation to you.
[Operator Instructions] Our first question is from J.J. Park, JPMorgan.
Dr. Lee, I have 2 questions. Number one is that the second quarter bit shipment, the growth were above your guidance of the single-digit percent growth. You mentioned that you see the demand growth coming from different applications. Can you maybe elaborate where you saw the biggest off-site, of course, applications such as software, DRAM, software PC or mobile or consumer? And I have a follow-up question.
Okay. If I hear you correctly, your question is, are we expecting to have bit growth of single digits and we're expecting the demand will grow on the second half and which sector we have seen the growth.
Well, I'm -- yes, my question is about your previous guidance of the single-digit percent growth in the second quarter, and you -- end of it is 30% bit shipment growth, yes.
Oh, okay. Yes, yes. As I described, the second quarter, we had growth on all segments, okay? That's including the consumer, and the second quarter is much better than first quarter, okay? And also the commodity side also has pretty positive growth. And on the low-power side, we've also seen some growth as well on the low power, okay?
Okay. And then you mentioned the inventory level at dealer manufacturer remained high. Given you shipped 30% more in second quarter and you're guiding the bit at 10% growth in the third quarter, when do you expect your inventory level to be more light?
Well, our inventory level is now very representative for the industry, okay, because our market share is relatively small, okay? So -- but however, our inventory had come down, okay, quite a bit due to that we had better sale on second quarter and we're expecting a better sale on Q3 as well, okay? The industry, overall, the bit suppliers' inventories are probably more than the determining factor for the industry trend, okay, and which I'm not the expert of that, okay? I think that you probably know that much better than I do.
Then what about the Nanya tech? Do you expect your inventory level to come down to normal level by the end of this year?
There's a good chance that we may be coming down to a much better situation by the end of this year, yes.
[Operator Instructions] Next, we are having Simon Woo from Bank of America Merrill Lynch.
Wow, it looks a great result, Dr. Lee. Congratulations. And we don't see any meaningful profit contraction in the second quarter, even the business environment was very tough. I think your leadership, your management did a great job.
Thank you.
So very quick question is, how do you train the high margin at over 20% with almost the mid-teen ASP decline? The quarter-on-quarter basis, your margin remained high. So that really means a quite significant cost reduction with over 30% volume growth. So how you want to explain your cost quarter-on-quarter trend to maintain high margin then?
Yes. Simon, thank you for your compliment. And yes, you are absolutely right, our gross margin dropped, okay? And the good thing is they are dropping too severely still, but it still dropped by almost 6%, okay? But the good thing is that we have shipment increasing by more than 30%, okay? Also that we have some costs down, okay, single-digit cost down as well. Okay? So that in combination, as a result, our gross margin, OP margin, they will now come down in more severe ways, okay? It's a reasonable kind of a situation.
Okay. And then my last question is, could you please repeat your total mix outlook? Because so far, your mainstream product is consumer and auto-related, maybe this area accounts for roughly maybe low 60% or mid-60% versus Low Power DRAM's still teens and the Server DRAM very minimal. So could you remind us your target for the product mix outlook for second half or even for long term?
Thank you. Thank you, Simon. Our current product portfolio is around 65% to 75% range over the time on consumer. Okay. And consumer is including quite a variety of the product sector, okay? That's including TV, set-top box, applications, industrial grade, automotive grade, okay, camera, smart speaker, SSD, all kind of different consumers, okay? So that's about 65% to 75% over time. And then so far, we have around 10% or so on low power. That's really small for the commodity as of today, okay? So our future, we'd like to grow more on the low power as well as the server market, okay? And we're still working on it, okay? We still don't have a very good result to report to you yet on the server market and the low-power market. But we're hopeful that we will -- there is some good result by first half next year, okay?
Now the line is open to Abhishek, Moody's.
Congratulations on the result. My question is regarding the recent ban in Japan regarding heating gas. So how does that impact Nanya? Does it have any implication on the supply going forward for Nanya?
I'm very sorry, can you repeat your question or comment?
Yes. It's regarding the heating gas supply, which Japan is currently trying to put a ban on that, like a restriction. So wanted to know what implication Nanya will have because of that.
Oh, you're talking about the Japan and Koreans, the trade discussion lengths, okay? Okay. I see. Okay. For Nanya, we don't see any impact from our ability to get the supply, okay, for those materials. Okay? We don't see issue on our sale as well, okay? So we don't see any impact either from our supply or our market. We don't see a big change yet. However, we will continue to watch or observe the situation very closely to see how it goes for the next few weeks. On the situation related -- if you relate it to whatever we did, it may impact the industry in a pretty big severe way, okay? However, I would say, as they understand more the potential impact could be very high, both sides maybe come down to more negotiation and more willing to come down to some agreement, okay? That's also a potential maybe happening, okay? So as far as the, is there any immediate impact, I would say so far not yet to Nanya Technology, okay? And to the market, maybe there are some short-term noise already happening in the spot market, okay? Is it going to be a long-term impact? We still don't know yet, okay? We will continue to watch that situation very closely.
Okay. And regarding your bit shipment guidance for 2019, should we see it as a low single-digit or a high single-digit bid growth for the year?
For the whole '19, 2019?
For the whole '19, yes, whole.
Yes. Yes, we're still expecting single-digit growth for our company.
But is it like a low single digit or like a high single digit?
Potentially, now it's mid-single digit, okay, and could be plus or minus, depends on the market trend growth. And as I described to you that we're seeing the macro economic uncertainty that continues to happen, and we're seeing high inventory level at the supplier side, okay? And on the other hand, we've seen positive sign of harvest season where we've seen also enthusiastic of customer buying product, okay, or that combination, okay? So how this will end up to be will depend on those uncertainties as well as the positive trends coming up. So we need to watch that very closely and react to the market.
[Operator Instructions] We got a new entry. The line is open to Louis Cheng, Macquarie.
Dr. Lee, I have one quick question. Regarding your second half guidance, currently, we assume there's no impact from the Japan-Korea trade frictions, right? And as you said, in a few weeks, we see some further changes. How will that impact our ASP and unit growth assumption?
Well, that's a pretty much assumption, pretty big assumption, okay? Yes, our assumption so far, we don't see a major impact due to that reason. But as I described to you that the material that had been described on the news is the key material that is pretty important, okay, and it's not easily replaceable, okay? Usually, change in a material like that requires requalification of many kinds, okay, or even the change in the math due to the OPC reason. And all even it requires some customer requalification, okay? So it's a pretty severe impact. And really, the material is not accessible through the manufacturer sector, okay? So it's really -- variability is an issue. There's going to be some substantial impact. However, as I described to you, it's only related -- key people and leadership understand the severity of this impact. They may negotiate harder and come to agreement quick -- come to an agreement quicker, okay? So these all are subject to certain uncertainty now, okay? But I really cannot comment more than just that. Okay?
Now we conclude the Q&A session for online. We are going to move on to the Q&A on-site. And as a reminder, please state your name and company name before asking questions. Dr. Lee, please begin.
Okay. We would like to take questions from the floor, okay? [Foreign Language]
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Thank you. That concludes our conference and conference call today. Please be advised that the replay of the conference will be accessible within 3 hours from now, which will be available through Nanya's website, www.nanya.com. We hope you will join us the next coming quarters. And thank you for your participation, and have a wonderful day. You may disconnect your line at this moment. Thank you.