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LARGAN Precision Co Ltd
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Good morning and good afternoon, everyone. Welcome to today's conference call. And Arthur, please begin the call and I will stand by for the question-and-answer session.
Welcome, everyone, to join LARGAN's September quarter post retail analyst meeting. Arthur Lai here. Today, we were pleased to invite the CEO, Adam Lin; and the IR, Josephine Huang, to give us an update.
Without further ado, I will hand the call then to Josephine. Josephine, please.
Okay. Thank you, Arthur, and thank you, everyone, for joining us today. We are pleased to report Q3 2019 results for LARGAN.
Consolidated revenues for the quarter was TWD 18.5 billion, up 31% over sales of TWD 14 billion in the prior quarter and up 13% over the year ago quarter. Revenue for the first 3 quarters amounted to TWD 42.4 billion, up 13% over the same period last year.
In terms of shipment breakdown in the third quarter, 20 megapixels and above accounted 20% to 30%, 10 megapixels products for 50% to 60%, 8 megapixels for 10% to 20% and 5 megapixels and below for 10% to 20%.
Looking at the consolidated statement of comprehensive income. Revenue for the third quarter was TWD 18.5 billion and gross profit was TWD 12.8 billion. Gross margin was [ 59.1% ], down compared to 69.6% in the prior quarter due to lower yields.
Operating income was TWD 11.2 billion, representing 60.7% of revenue.
The company posted a nonoperating loss of TWD 354 million in Q3 including a [ TWD 785 million ] foreign exchange loss recognized due to the depreciation of RMB against the Taiwan dollar.
Net income for the quarter was around TWD 8.6 billion or TWD 63.85 per share after-tax.
At the end of the third quarter, LARGAN's total current assets amounted to TWD 143 billion, of which TWD 85.1 billion was in cash and cash equivalent. Other current assets included TWD 17.5 billion in account receivables and TWD 3.9 billion in inventory. Total assets amounted to TWD 143 billion.
Liabilities recorded at TWD 24 billion, most of which was in current liabilities.
This summarizes LARGAN's financial position overall. Thank you.
Yes. Thank you, Josephine. While Frank is giving the instruction of the dial-in, I would like to throw 2 questions.
Number one is can you share with us how company view the additional foreign exchange hedge policy and how we think of this [ nonop ] gain and loss from foreign exchange?
Well, we basically do natural hedging and so we're subject to fluctuations in the USD and the NTD -- against the NTD. So a lot of it is actually beyond our control.
Yes. Yes. Got you. So think about quarter 3 case, was renminbi actually depreciated significantly and then also USD also appreciated significantly. So how is the sensitivity between these 2 currencies? Which one is more sensitive to your foreign exchange loss or gain?
Unfortunately, we don't disclose that.
Okay. Got you. And also I think in the last call in the Chinese, it doesn't actually share a lot of technology trend in 2020. Can you also -- can Adam or you summarize this 2020 IT trend?
We feel that we're not...
We are really subject to the customer's design. What they are looking for is not what we can discuss now.
Yes. Yes. Yes. Okay. I understand. I think we talked about a lot of different technology subjects such as 70 or under-screen camera and also the Ax and OS separation design to favor the highest specs. Among those trend, which one you think is more -- biggest topic to you, if you can ranking those technology order?
It really depends on how the vendor will -- we cannot come in to introduce what kind of camera they want. We only supply what they want us to do.
[Operator Instructions] And now our next question comes from [ Singh ] with Consilium India.
Yes. So I just wanted to check with you in terms of -- based on the customer feedback for the next financial year, how do you see the mix of lenses going forward in terms of megapixels? Could you give us some visibility on the product mix for the next year?
[Foreign Language]
[Foreign Language]
Some vendor is looking forward to like higher pixel one and some stay the same. So I cannot conclude any product mix going forward.
Okay. So let me rephrase it. So as we look at Samsung and Apple migrating to higher-end camera lenses and the volumes picking up, do we see an incremental shift towards a higher end mix for us for the next financial year? Or is it going to be -- it's too early to comment on that for now?
We don't comment on particularly identified customers.
Yes. But in general, as a whole, is it like too premature to comment or -- just to get a flavor of how we are migrating towards higher end.
Some are migrating to higher end, yes.
Okay. And again, on the hedging policy, could you just show some more light in terms of the natural hedge that you mentioned during early part of the comment. I mean how does the natural hedge work here?
We don't actively do hedging. So basically, we do just change our USD foreign currencies into NTD when necessary.
Okay. So I'd assume the depreciation actually help us?
No. Because most of our payables are in Taiwan dollars, okay, and also a lot of our revenues are in USD and RMB. And as you know, the renminbi actually depreciated a lot against a lot of currencies including the Taiwan dollar.
Okay. So what percentage of your revenue would be in foreign currency?
That we don't disclose. I'm sorry.
[Operator Instructions]
I've got a question from online. Investor, they ask since mentioned we are rounding out the capacity and then the investor is actually looking at the revenue growth next year. So how LARGAN to utilize your current capacity or space to grow next year. Can you give us some direction?
We still will be focusing on prioritizing our capacity to higher-end camera.
Okay. And do you -- since you mentioned that the yield right now is still not satisfied, how much percentage over yield rate you think you can improve in the next year?
I don't know. I don't know. It really depends on the specs.
Got you. Got you. Yes. And also another follow-up question is on the competition. You always are confident about competition is not an issue and it depends on -- and kind of wonder which segment you are talking about, i.e., you have less competition in the high end or low end. Can you share some more context or color behind this competition topic?
We've always said that competition is very strong, okay, and so it's something that we are always watching out for.
Okay. Okay. Yes. And lastly, margin. A client asks, how do you see the margin next year as more complicated and sophisticated lens are being introduced? Shall we see your margin actually go down a little bit like this quarter? Or that would be offset by the other yield improvement from the other mature products?
It is market factor stuff, so I really don't have the figure right now.
Got you. Yes. And how do you see your 70 or 80 ranking this time around?
I believe more customers will design in 7 [indiscernible]. And about the 80, it still depends on how we could mass production on them.
Got you. Got you. And lastly, this is my last question, I promise. Talking about the intellectual property portfolio, do you feel that you have a much stronger portfolio and IP in the 70 versus the 60?
I believe both are very strong.
Sorry. Can you say that again?
Both are very strong.
Both are very strong. And I think, I read some newspaper, you just -- our company filed a [ tightening ] shipment to a Taiwanese company. Can you share with us what's the purpose to do that and then how is the result you want to see.
Protect IP, I believe, is the concern of all companies.
Yes. So -- yes. Okay. And I don't have questions. So Frank, do we have question in the queue?
And the question is from Julie Tsai with UBS Taiwan.
So Adam, when you say you want to allocate capacity towards high-end spec, can you let us know is considered high-end spec for you, is it in terms of pricing, in terms of margin? Can you share some color with us?
When it comes to higher specs, it always has the higher price and it is more difficult to produce it, so that's what we prioritize, more challenging ones.
And does that necessarily translate into higher margin or probably not?
Sometimes it's really low. It doesn't really transfer to higher margin. Am I answering you?
And in addition to the complexity of the production of those products, do you think if you are facing yield rate issue or other competitor probably would not be able to do manufacture anyway. Would that be safe to say?
I cannot say.
[Operator Instructions] And our next question comes from Rob Ridland with Schroders U.K.
My question was on the yield issue you mentioned. Can you describe what the yield issue is perhaps and maybe how close you are to addressing the issue?
The yield is really a market factor stuff. When it comes to higher spec, it is always need a longer learning curve and so we start off with a lower yield. And as time goes by, we, hopefully, most of the time, we were -- might recover the year. It really depends on the spec, how high the spec is.
And given the current products you're producing, how close are you to getting over the learning curve?
It still depends, depends on how the spec is. If the spec is higher, you need a longer learning curve.
Right. I'm sure you're producing at the moment high spec for new products. So I was wondering in this cycle, whether you are close to going through the learning curve process or you still had a long way to go?
Let me clarify because we have a lot of models going up, so the spec is different for every model. And there's never a time when the yield for every single model is at maximum yield.
Right. I guess then the question is are we sort of at the upper end of your profit margins? It seems difficult to basically get your gross margins any higher than this level. Is that fair?
It really depends on the price. And the yield, it is still a market factor to us. So I don't know how we can see this.
Okay. Can I get a bit of, moving on, an update on sort of CapEx? I think you were looking sort of new land and new facilities. So what's the latest in terms of your expansion plans?
We have bought in some land already and it will be -- I believe, the new factory will be 4 years. It will still take 4 years to go before we...
Right. And just to confirm, on the factory next door to your old one, so the new factory that's operational, there remains a lot of capacity there? Or the capacity there will be quite limited as soon as next year?
[Foreign Language]
[Foreign Language] It will be probably full by the end of the year.
End of 2019 or 2020?
2019.
So your new factory is potentially going to be full this year?
Yes. At the end of this year.
Right. But your revenues have only grown 13% and that's filled up an entire factory?
Year-to-date, yes. Year-to-date, it's grown 13%.
Right. But you built a brand-new factory that was similar in size to your old one and you're saying it's full and your revenues are just growing 13% in that time?
Yes.
Okay. Moving on, just one more question for me then was we had talked before about sort of new product development. Can you give us the latest update on the customer demand for some of the new products that you were putting into research and development?
Okay. The pixel migration is still going on and the sensor side is growing and growing bigger and that is very challenging for LARGAN side. And that is one of that and the process is getting more complicated, so that takes -- it is like more room to produce it, the lenses.
Okay. I've got a question from e-mail from client. He asked me -- he asked Adam like how would you mitigate the capacity issue to support the next year's activity?
I believe that is only improving the yield and efficiency is the only way to do.
Yes. And how do you improve the yield and the efficiency? Can you give us some example?
Work harder.
But I heard your volume already half.
Yes. So let me maybe elaborate a little bit more because I think in some premium lens actually, for example, under screen camera there is maybe a complicated design and you are probably only one who can give the simple. So I mean do you regain the power to kind of pricing higher premium of lens? Or do you find a way to do something that the other lens maker cannot do?
Again, I don't believe we are the only one who could supply all the lenses, but we are always willing to get like a more challenged project and to produce the higher-end one and so try to get like a higher profit from the project. That's our policy.
Got you. So conclusion is that you are not trying to optimize the financial number just because you want to grow faster. You want to -- you're actually going to challenge yourself and your company to do the more difficult lens. Is that how you -- part of your -- is that your strategy?
Yes. Initially, it might be -- the yield might be really low, but as time goes by, hopefully, we will get -- come to the sweet spot and have a higher yield and we get a higher profit.
Yes. Correct. Sorry, the same client also e-mailed me and he asked, do you see any change in customer's purchasing behavior?
No.
Okay. Yes, that's it from client.
We do have follow-up questions. And the question is coming from Julie with UBS Taiwan.
Adam, I just want to follow up with the -- I think it was Robert's question regarding to the capacity that you have invested in over the years that would probably be doubling your previous capacity, but that doesn't translate into the revenue number, meaning the revenue does not grow at the similar percentage. I'm sure there is some more logical explanation for the comparison between additional capacity and revenue increases. So maybe we could ask Adam or Josephine to share with us on that question.
Capacity-wise, when you say we doubled it up, actually it is not because the process become more complicated, it take up more space. So that, the space, don't translate to double the capacity. It take more machine to produce higher end, so it take up the room. And that's why we need more room to produce -- the same lens, the same single lens probably need more machines to produce it. So that's why the capacity is not really translate to double up. Am I answering you?
Yes. I think that's a very good explanation and more logical way for us to think through the amount of floor space that you put in versus the expectation of the revenue that you could generate out of it. I think that's actually very good reply.
Maybe furthermore developed into that question is have you -- in the -- over these few years, the return on your investment, is it as good as previous years, or even higher on the amount of money you need to put in into adding on new capacity for your client?
Maybe it still may take some time. If more customer really adopting more higher-end camera and -- like we want, we hope and the yield go to a -- come to a sweet spot just like we wanted, then it might generate more profit, but vice versa.
Okay. And in terms of yield rate, it's not as optimum as you want it to be but looking at your gross margin, it is actually around 70% already, right? So any more room that you improve at yield rate could bring up your gross margin even higher? Is that what you want to -- is there a level that you want to see your margin to improve to?
In the new model, always suffering from the yield loss. But the old model, it's going smoothly. So when I say the yield is growing, it is always referred to the new model.
And the new model's gross margin is always lower than corporate average?
Yes.
So your definition of yield rate improve, as long as it reaches to corporate average, it's probably -- you will be happy with it. Is that how we should look at it?
We're never happy with it. We're never happy with our yields.
Okay. But I guess the target would be bring up the yield rate to reach the corporate average gross margin. Would that be fair to say?
Yes, you can say that.
And sir Arthur, we don't have question at this moment from the queue.
Yes. Okay. Thank you, everyone. So many good questions. So if we don't have a question, I want to conclude the call. Yes, so thank you, everyone.
Thank you.
Thank you.
Thank you. The conference call has been concluded. Thank you for your participation.