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Chinese to English: Transcription of Conferences General field: Tech/Engineering Detailed field: Business/Commerce (general)
Source text - Chinese BP中游集团合伙人（BPMP）
2019年第一季度法收会议语音记录
2019年5月9日，10:00 AM ET
Translation - English BP Midstream Partners (BPMP)
Q1 2019 Earnings Conference Call Transcript
May 9, 2019, 10:00 AM ET
Corporate Participants:
Guangzhong Chen -- President of LITE-ON GROUP
Operator:
Welcome to the Q1 2019 Earnings Conference of LITE-ON GROUP.
After everyone takes a seat, our meeting will begin.
Today President of LITE-ON GROUP Guangzhong Chen has come to the meeting. Today’s meeting contain two parts. First, I will report the Q1 2019 Earnings. Then, there will be a question section for guests to ask questions and make further introduction.
The Net Sales of Q1 2019 Earnings of LITE-ON GROUP is 41.173 billion, our COGS is 35.767 billion, our Gross Profit is 5.406 billion, Gross profit rate us 13.1%, Operating Expense is 4.252 billion, Operating Profit is 1.155 billion, Operating Profit Rate is 2.8%. Plus other income 0.782 billion, our Profit before tax is 1.937 billion. Taking Income Tax Expense 0.465 billion and Non-Controlling interest 7 million into consideration, our Profit Attributable to Parent is 1.465 billion and After Tax EPS is 0.63.
Compared to former year, our net sales’ quarterly return is -18%, yearly return is -15%. If not including the matter related to selling mobile phones, our net sales of yearly return is -3%. I think other than the reason of less working days in the traditional low season, there are two other parts, one in the far-from-expected terminal demands of LITE-ON market, the other the continual decline in the prices of SSD which are responsible for the current situation. But several of our core businesses are still growing yearly, which includes our electronic businesses. Electronic businesses include cloud calculating, AI Smart Home and the electronic consumptions. These sections all have a good increase. Meanwhile, our LED automotive electronic is also increasing compared to last year. Although with the far-from-expected demands in the terminal LITE-ON market and the continual decline in the prices of SSD, our core business in the AI Smart Home, electronic consumption, game machines and LED automotive electronic keep increasing.
Gross Profit Rate’s quarterly return is -20%, but it is the same compared to the same time in the last year. The reason is that our improvement in supply chain management and operating efficiency which makes our gross profit rate 2% more than the same time in the last year.
Operating Expense’s quarterly return is -13%, yearly return is -8%, among which, our expense in RND is 3.5% of the whole operating system. So we continue investing in RND.
Operating Profit’s quarterly return is -38%, yearly return is -47%. Plus the other income, our income tax expense’ quarterly return is -35%, yearly return is 35%. Our profit-attributable-to-parent’s quarterly return is -42%, yearly return is 41%. In the operating external income and expenditure, net interest income of Q1 is 0.249 billion, exchange income is 0.225 billion. Plus other incentives of 0.37 billion, our net income out of operating system in Q1 is 0.782 billion.
If we see through different sections, our income mainly came from three business apartments. First is Opto-electronics, which accounts for 16% of the whole income, second is Information-Technologies, which accounts for 65%, third is storage, others are 5%.
If we see through the amount of money, Opto-Electronics of Q1 is 6.556 billion, yearly return is -45%, the major reason of this is because in Q1 last year, we still have the business related to cameras of mobile phones. If not including the part of cameras of mobile phones, our yearly return will be -6%. Then this reason will be cause mainly by the far-from-expected demands in the markets. In Information-Technologies, income is 26.645 billion, yearly return is 5%. This is mainly because of several applications of electronic management which includes continual growth in cloud, AI Smart Home, and electronic consumptions like game machines. In Storage, income from Q1 is 5.78 billion, yearly return is -26%, two reasons for this, one is the continual decline in ODD, second is the decline pressure of prices of SSD in Q1 this year. In others section, income from Q1 is 2.189 billion, yearly return is -35%, reason for this is because of the mobile mechanics, without which it will be the same.
If we see through operating profits, Opto-electronics operating profits are 0.13 billion, yearly return -23%, which is caused by the far-from-expected demands. Information Technologies operating profits are 1.51 billion, yearly return 109%, which is caused by the high technology products. Storage profits are 14 million, yearly return -97%, which is a bottom of the Q1, reflecting the continual decline in the prices of SSD and our decrease in ODD. After mobile mechanics was sold, our loss in the income of others section is decreased to 0.167 billion, 0.12 billion less than the same time last year.
Cash and equivalent is cut down 0.8 billion, but our accounts receivable has been cut down 9.9 billion, which is 4.9 billion less than the former quarter. Our short term debt has been cut down 5.3 billion, our accounts payable is 10.8 billion less, so our total assets has decreased 16.7 billion, and total liabilities has been cut down 18.4 billion. The extent of the decline in the total liabilities is more than the extent of the decline in the total assets. So there is an improvement in the total liabilities towards total assets both quarterly and yearly. Our net cash is increased to 37.68 billion.
If we make a quick conclusion of Q1 operating results, we can see we have a yearly return of 4% in net income after tax, the operating income of Q1 has increased to 41.2 billion, continual yearly growth in the core businesses includes electronic managements of cloud, AI Smart Home and game machines. Meanwhile, LED automotive electronics is also increasing compared to the same time last year.
The gross margin and total margin of Q1 is respectively 13.1% and 2.8%, which is 2% and 1.2% more compared to the same time last year. The reason is mainly for the improvement in operating efficiency, the optimization of supply chain management and products portfolio, which makes our net income after tax in Q1 1.47 billion and APS 0.63, yearly return 40%.
Expecting the second quarter, the first quarter usually is the bottom of the year, so we believe that there will be an increase in both operating income and the income rate in the second quarter. The main motive for this is from a stable demands of cloud calculating, AI Smart Home and LED system as well as automotive electronics, we predict these sections will all have a continual improvement in the second quarter.
From our balance sheet, it is extremely promising, net cash is increased to 37.7 billion, which is also attributed to our active management of operating capital.
Next section is for the question section, please ask any questions if you wonder, we will make further introduction, thanks.
Questions and Answers:
Male Guest:
Hi, two questions. First is you just say that this part is working well, but yesterday another person says something wrong regarding to this part, is there any difference between what you see and what we see, and what do you think of the second quarter. And the second, regarding to SSD, when or to which extent do you think this decline will be or will this decline stop and reaches precipitation eventually.
Male Answerer:
Well, in this area, those are all open information, I think it is not good for some companies because of the excessive production in the second half last year. In my opinion, from Q4 last year, it is true that demands have declined, so I think we are not that active in the expansion. But the noise in Intel you just talked about is dependent on the performance of the past half year, which have a very good performance in CPU. So I think this is related to machines quality. If quality is improved, the speaker yesterday means to know whether it can behave as well as the first quarter in the second quarter. So as a whole, I personally believe there is an optimistic growth, as to oversupply, based on the newest open information, the inventory has not been cleared in Korea. One of ours also believes that there is a rebound in the second quarter, so we need to increase inventory. And from as far as I know, the extent of the reduction in the prices of the second quarter has been extremely small compared to the first quarter. Every buyer has made a different decision, some believe it is beyond the line, some believe the influence of reduction is still going on, demands are still short. Real recovery, we think, is not until the third quarter. But from some profound aspects, we can tell that none of them are affected by those factors.
Male Guest:
I have a question regarding to LED, for now, how is the extent to which LED margin makes profits? If we assume now we need to expand in China, what kind of strategy will we take in the niche market?
Male Answerer:
Well, as a whole, China is expanding in LED, especially those related to automotive electronics. Because we were doing niche market, all the parts of LED account for a small percentage. So the expansion in Chinese production is related to automotive electronic, which will have some influence on Taiwan. Our part in LED is very small, so it is not influenced a lot. Due to the global economic recession, of which Chinese recession is the largest part, all the demands will decrease, causing competition on prices. So still LED is affected somehow. As for other aspects, like automotive electronics, we are facing competitions. But our core growth is mainly in the application products, especially in infrared, so we are still in a growth track in these areas.
Male Guest:
As for automotive application, if we negotiate prices, can we sustain in an probable price range?
Male Answerer:
If we collaborate with global pear one, we can follow the contract price. Do you know that there three cars sold in Chinese market? One from native companies, one from joint venture, one from foreign companies. The cost pressure in the Chinese native companies is very high. So the most influential part is from Chinese vehicles part. But we are still very small in our whole portfolio, which is not our biggest portfolio. Our biggest portfolio is still on the join venture.
Male Guest:
I want to ask if the percentage of Information Technologies can still be improved a little. And also how do we expect the second half year of the influence on the productivity and net profit rate from the production of new companies?
Male Answerer:
We keep investing in the high-level exchange system, but it is not to the extent of being effective, which means that our growth in the Information Technology is still comparatively high.
Female Guest:
Hi, I want to ask the working progress in the automotive cameras.
Male Answerer:
It will be produced in quantity this year, but the quantity is small. And it may take three years, the life of whole case is around 7 to 8 years. Automotive aspects are more sensitive compared to normal aspects, which is one reason. And another reason is we need to produce products based on the models of the car types.
Male Guest:
I want to know how the sales and margin of Q2 will look like compared to the Q1 and also your views towards Smart Speaker.
Male Answerer:
Generally speaking, we are still optimistic. As I have said in the Q1, from the October last year to the Q1 this year, we have seen that every new full case is a little bit downside compared to the old ones. But the downside extent is not large, which is still a down trend. As far, there should be a mild growth compared to Q1. But it is still not sure, we have to figure it out until the whole quarter settled. For now, the prediction is just an optimistic gentle growth, in which margin still has a chance. Last year we have two unsettled businesses, so Q2 of this year must be better than the Q2 last year. Even not considering any of it, it still looks better after all. If comparing the continual operating parts with this, we are still having chance in the Q2 than the same time last year.
Well, it is pretty stable regarding to the Smart Speaker. Another person can fill in more information regarding to it.
Male Answerer (the other):
It is sure that there is a certain space in the cost of Smart Speaker. From a long term, it is a very good trend. This is all my complements.
Male Answerer:
Now there are a lot of ways of change, Smart Speaker is itself promising. But it is hard to predict what kind of influence the change may cause.
Male Guest:
The operating expense of Q1 is about 42 billion, which is reduced a lot, what do you think of the expense in Q2.
Male Answerer:
The first quarter is 4.2 billion, without particular disposable factor. We are still actively controlling the operating expenses.
Male Guest:
I remember that you said before that the costs towards RND would be comparatively high due to the development of new products. So is this factor a seasonal factor?
Male Answerer:
Yes, it is a seasonal factor.
Male Guest:
Do we need to see the expenses of the company in the normal way?
Operator:
Let me answer this, from this OPEX, we have several indicators to check. RND accouts for 3.5% in the first quarter, we are mainly investing in cloud, Opto-electronics and automotive electronics, so there will be no continual improvement in the investment of RND. It is around 3 % in the same time last year. But now it is 3.5%. So we are at least 3.5% in the future. And because of the scale of SGNA, it is around 6.5% that SGNA accounts for. If it is in a peak season, especially the second half year, the revenue will be comparatively high, then we will have a leverage on revenue. So the percentage that SGNA accounts for can still be squeezed. But in a off-peak season, the percentage that SGNA accounts for is still comparatively high, yet of which the amount of money can be controlled.
Male Guest:
Basically, the fluctuation of the amount of money on expense is still comparatively at advantage. Then I have another question to ask, regarding to the SSD, how will you look at the future of this part?
Male Answerer:
As for this part, we have experts who also do analysis towards it. It is not likely to rise with the same proportion in the productivity. So every strategy now is different. After oversupply, some returns to the old situation. So the productivity of the old type is comparatively high, of which costs will be comparatively low. So the competition of this aspect is multi-dimensional. There are two angles to perceive the problem. So everyone’s strategy is different, all taking advantageous decisions towards themselves. So it is not easy to predict the second half year. The reason is the biggest consumption is quality center and mobile phones. And based on the open information from the two markets, there are uncertainties in both of them. The percentage of the factor of PC is comparatively small, so I cannot be optimistic. But like apple’s new machine last year, the capacity of SSD doubled, which will produce demands and supply. But if the effect is not good, it will have a huge influence towards suppliers. Actually, other parts of our revenue from the past half year are still mildly growing.
Female Guest:
We have made over 30 billion in cash in the first quarter. What do you want to do with this amount of cash at hand? Do you want to make more investments or maybe repay to the shareholders?
Male Answerer:
As for repaying shareholders, we have already improved the pay rate from last year. We will make certain decisions towards some business that look fine for now and not fine in the future. Meanwhile, we will increase investments into the businesses at hand, especially electronic businesses and things related to LED as well as automotive electronics. Of course, we will not rule out the ways of merging in order to expedite growth. Moreover, Vietnam is the main area that we invest in, mostly for the cost factor, some for the tariffs problems because of the trade war. In Taiwan, the main reason is still related to the current local content.
Male Guest:
We have mentioned that there is some noise in the SSD parts, do all the effects are influencing the prices? And what do you think of the second and the third quarter?
Male Answerer:
The price of SSD has already some bad signs in the Q1. We have made some reductions on the revenue for the first time. But we have to do this. It hurts for the decline in the market price. Yet we have negotiated with suppliers, so the influence on the Q2 profits will be minimized. We assure that the profit rate is the first priority.
Male Guest:
Then the second or the third will return to a traditional normal standard, or the second will be a little bit worse.
Male Answerer:
It will be a little bit worse compared to the Q2 last year in the Q2 this year, but it is unclear towards the Q3 this year.
Operator:
Without further questions, the Q1 2019 Earnings Conference will reach an end now. All the information we possess will be put on the official websites.
Thank you for your coming!
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