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Okay. Thank you, everyone, for joining today's Advantech First Quarter 2024 Result Call. My name is [ Sheng ]. I'm the coverage analyst of the Advantech in Daiwa Capital Market. Today it's our honor to have Eric Chen, President of General Management; Linda Tsai, President of the Industrial-IoT Group; and Grace Liao, the Senior IR Management to discuss the first quarter result and also the business outlook with us. Grace will walk us through the first quarter financial result first, and then after that Eric will provide some business updates for us. And then we will open the Q&A session from the floors. So without further ado, I will hand it over to Grace. Grace, please go ahead. Thank you.
Thank you, Sheng. Good morning and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the Senior IR Manager of Advantech.For Q1 financial results please see the table here. Q1 revenue reached TWD 13.9 billion, declined 20% year-on-year, and the drop 8% quarter-on-quarter. Gross margin rate reached 40.0%, maintain historical high level. Operating profit was TWD 1.9 billion with operating profit rate reported 13.8%, decreased from 20.1% in first quarter last year, mainly impacted by low utilization rate and a high expenses rate resulting from revenue scale down. For nonoperating items, FX gain in Q1 around TWD 172 million. Q1 effective rate, tax rate was 17.9%. Net income reached the TWD 1.99 billion, decline 33% year-on-year.Earnings per share in Q1 '24 was TWD 2.32. Both Q1 revenue and the gross profit rate in line with the company guidance. However, Q1 operating profit rate was slightly lower than expectation, okay.For regional performance, in terms of the U.S. dollar first quarter '24 revenue reached USD 443 million, declined 22% year-on-year. For regional performance, most regions suffer from double digit decline. Only Taiwan market outperformed, there was 9% year-on-year growth, benefiting from sports lottery projects in Taiwan. For the major 3 markets, both North America and the Europe markets were double-digit decline year-on-year due to weak demand. China market dropped 6% year-on-year, indicating the down trend is decelerating since the demands in transportation and also semi equipment have slowly picking up.For the SBG performance, all segment experience double-digit decline due to weak demand. For the major 2 BU including Industrial-IoT and also embedded IoT year-on-year decline 19% and also 30% respectively. Service IoT dropped 13% year-on-year due to weak demand in Smart City services and also [ iMobile ] projects.For the balance sheets, this is also my last page, for the balance sheets, as you can see, cash and the cash equivalence accounts for 33% of the total assets. We are quite sufficient in the working capital. And also we continuously control over inventory. As you can see in the dollar amount, our inventory accounts for like 14% of the total assets, down from 19% in Q1 '23. However, inventory turnover days maintain 106 days due to revenue scale down.Now I'm hand over the time to President Eric Chen to share the overall business and also outlook of the second quarter this year. Thank you.
Hello. Good morning and good afternoon, everyone. Welcome to the conference today. And I am Eric and I would like to comment on the first quarter results, then the second quarter guidance. In the first quarter, we experienced low B/B ratios that started in 2023, which result in a predictable drop in our top line. Our operating profit declined 45% year-on-year and 29% sequentially. This was mainly due to the low utilization rate and the surplus material [indiscernible] in February, which impact the monthly GP performance by 2.5%. As for regional performance, the U.S. and the European market [indiscernible] resulting in significant decline in the demands. China market gradually rebounded with a B/B ratio 1.0 and a single digit decline in the first quarter. From a product perspective, we encountered weak demand in different sectors, including factory automation in China, gaming in Europe, retail, and the low season of the DMS project. IIoT, ACG and SIoT declined 19%, 15% as 16% (sic) [ 13% ] respectively. EIoT and ICVG declined by 30% and 27% due to high base periods.Gross margin were on track. The lower utilization rate in quarter 1 due to the Chinese New Year has passed. And we expect the gross margin to maintain stable in the upcoming season. As revenue drop by 20% and expense increased [indiscernible] quarter 1 earning per share was TWD 2.32. Also a 33% decline year-on-year and 13% decline sequentially.Let's move on to the B/B ratios. Let look at the B/B ratio trend across different regions. As you can see on the page, the B/B ratios are below 0.9 throughout 2023, and in 2024 quarter 1, it was 0.97. The U.S. and the European regions rebounded to 0.91 and 0.97 respectively. And the China region up to 1.0. The booking amount has slightly increased for 3 consecutive quarters from USD 386 million in quarter 3 last year to USD 426 million this year quarter 1. The B/B ratio in Taiwan and Korea has also risen to above 1.Next page, please. Down. Looking ahead to the second quarter, even though the bookings in quarter 1 has slightly increased, the demands for the U.S. and European market still does not show a strongly rebound. Therefore, we anticipate the revenue for the second quarter to be between USD 435 million and the USD 455 million based on the exchange rate assumption of USD 1 to TWD 32.Regarding margins, the second quarter gross margin is expected to be between 39% and 41%, while the operating margin is forecasted to be between 14% and 16%. This conclude all my comments. And thank you for your attention.
This is the presentation for the first quarter and also second quarter guidance, and now I hand over the time to Sheng. Thank you.
Okay. Sure. Thank you very much, Eric and Grace. It's now Q&A session. Management has prepared several questions for investors beforehand. Firstly, we will go through those questions first and then open the floors for the online participants to raise questions later. So for the first questions are related to the financial outlook. And the very beginnings of the first questions are we would -- most of the investors would like to know about the outlook for the second quarter of this year and also the entire year in 2024. Could Eric provide some colors about which end-customers would the industry or even application could show strong end demand recovery? Thank you.
Okay. Thank you. For second quarter guidance, which I mentioned earlier, our consolidated revenue will be between USD 435 million and USD 455 million. And the gross margins between 39% and 41%. And the operating margins between 14% and 16%. As for the full year's guidance, we do not have specific figures to release at this moment. Our internal goals is still to maintain the positive growth these years. And regarding the end demands of each region is experienced difference situations in the U.S. like gaming sectors and the video streaming sectors remain strong. And in China, the transportation sector [indiscernible]. Meanwhile, semiconductor demands has rebounded in Korea and Taiwan after hitting a low point. So this is my guidance regarding the quarter 2. And for full year's guidance, sorry, we don't have a specific number to release at this moment.
Thank you, Eric. Very clear. So for the second questions about the financial outlook, investors was also keen to know when will the B/B ratio to return 1.1? And any more meaningful change in B/B ratio in terms of the region over the past 3 months?
Okay. It is a challenge to pinpoint. B/B ratios are returned to 1.1. We eagerly anticipate this happening in quarter 3, again in quarter 3. But it still has many uncertainties. The B/B ratio in the past 3 quarters shows an up trend. Also, the booking amount increased quarter by quarter from USD 386 million in quarter 3 to USD 426 million in quarter 1 this years. So furthermore, the B/B ratio in China, Taiwan, and Korea has surpassed 1.0, indicating a [indiscernible] outlook. We foresee these 3 regions as the key drivers of positive growth for us these years, and for the U.S. and for the Europeans. So we are not foreseeing the B/B ratio will return to 1.1 in a quarter 3 -- in quarter 2 or quarter 3. Yes. This is my answer.
Thank you, Eric. So, for the third questions, investors also would like to note about is there any plan for the Advantech to adjust the selling price in 2024? Besides, how should investor think of the gross margins and also our operating margin trend in the following quarters? Any like positive or the negative factors to impact the profitabilities ahead? Thank you.
Okay. Thank you. Thank you for the questions. The gross profit performance is influenced by various factors, including the selling price, operational efficiency and raw material costs and the product mix. In terms of selling price, we encountered a strong price competition in Chinese local market which led to a twofold [indiscernible] selling price in our regions that have no significant change. As for operational efficiency, we just consolidated the Taiwan [indiscernible] and now all the production line in Taiwan are centralized in one location which will positively impact our production cost. And for the raw material, our internal data shows we gained 1.9 percentage point in cost saving in quarter 1. Also for the product mix is a key factors in terms of gross margins in the first half. IIoT performance is expected to be better than the EIoT, which will bring us a positive result as well. Considering the overall positive and negative factor, our gross margin performance have a great chance to maintain at 40% this year. Yes.
Thank you, Eric. Could you also add a bit on the operating margin trend? If we have stable gross margin trend in this year?
I think for the op margin trend it's still under the 14% to 16% for this year. Yes.
Thank you. So for the last questions which related to the financial outlook, investors also would like to know about the potential capacity expansion plan in 2024 and '25 and the current capacity in each regions including the Taiwan, China and also Japan.
Okay. Advantech currently impact '23 [indiscernible] 11 in China, [indiscernible] Taiwan and 4 Japan due to the decline in demand the utilization rate in China is around 70%. In Taiwan it is about 90%. And in Japan, it is little bit high, around 93%. For the CapEx in 2024 to 2025 we are currently working on 2 main projects. The first [indiscernible] which is expected to be complete in quarter 3 of 2026. The total construction fee is around USD 75 million. The second project is the second manufacturing center in Taiwan Linkou campus which is expected to be lunched in quarter 2 of 2028. The total construction free is around [indiscernible]. Therefore the total CapEx will be around USD 80 million annually from 2024 to 2025, including the construction fee for 2 buildings and some production line and R&D equipment upgrades. So this is our CapEx plan for the year 2024 and 2025.
Okay, thank you, Eric. Very clear. That will conclude for the first part of the financial and outlook questions. We will jump into the regional B business unit or the subsegment business unit questions. So the first question is that investors also would like to know about the current market, China. Could management provide us some colors about the current competition landscape in China? So Eric just mentioned that we actually see some more fierce competition in China. What will be the impact from the consumption downgrade trend in China? And can we have some more colors on the Industrial-IoT segments? Thank you.
Thank you, Sheng. This is Linda on the question of Industrial-IoT. Regarding this question for China, this year, 2024, we have not observed a significant market rebound in China. However, there are signs of stable demand showing no further decline. Despite this, our channel partner and OEM there has stayed to increase the stock level and actually prefer the shorter lead time instead. So for Advantech we will be preparing some buffer stock for China-focused product to support the rush order. And the competition, the competition for China continue to be very intensive, especially within the energy sector and industrial equipment for electronic device, EV battery and solar, where the Chinese local vendor, especially Chinese local vendors are trying to get more market share from Advantech. Nevertheless, I believe Advantech recognition and quality are highly appreciated in some industry, especially mission-critical application by healthcare and semicon equipment. And some of the OEM from China, they are eager to develop the overseas market. And I believe that provide Advantech a very distinct advantage over local competitors. Indeed, the price pressure may be very high for the survey valuation fundamentals. Also we have the global network, I believe that we can get some more flavor on the margin wise. And in addition, because Chinese market is quite different than rest of the world, they have really unique characteristic compared to other regions in terms of the product requirements, not just for China-made silicon also for any other, like what we know for the Intel or the Arm or AMD product. So Advantech still continue to implementing China for China product strategy for both general purpose industrial application and for specific vertical market application. And for Industrial-IoT, in addition what I mentioned about the price competition, market competition for energy and industrial and for transportation sector, as Eric mentioned previously, after the COVID, after pandemic, for transportation investment, especially on the roll for those that they leverage a lot of edge AI technology and try to do the advancement for intelligent vehicle collaborative system we see the demand is increasing. And I believe it is because is that the need and also the technology is getting mature for local silicon vendor like Huawei or NVIDIA. So Advantech collaborating closely with Tier 1 AI accelerator provider, and to provide the tailor-made product solution for those increasing need, especially for transportation. So here's the sharing what we observed of the market event for China and the competition and how we do to work with our partner no matter on the AI, on the Industrial-IoT transportation-wise. Yes, so here is my feedback.
Thank you, Linda. Very clear. And then we will jump to the next question. So for the second question about the region, due mainly to the high inflations and the potential longer-than-expected for the interest rate cost from the U.S. fab, what would be the current demand from the Europe and U.S.? As Eric just mentioned for the first quarter actually we are seeing the revenue from the Europe and U.S. actually saw still in the double-digit decline. Do we -- can we see a slightly better demand from -- for the following quarters? Thank you.
In both North America and Europe, the quarter 1 is not doing well. B/B ratio below 1. The primary revenue contribution in these 2 major regions are large key account who are in the past provide a longer visibility of the purchase order. This year of course we benefit slightly from medical equipment and gaming and gambling, which grew a lot from last year by till the end of the year. But in the quarter 1 and also the end of the year, we expect to be flat, especially on the gaming, some of the regulation change in some European countries. So some of our gaming and gambling customers put their shipment plans on hold and we'll wait until the better clear policy to be released. So for U.S. and Europe, some of the customers, especially the OEMs still have some inventory to come soon. The situation is a little bit different than China. So we believe that in U.S. and Europe we might have to still wait until like quarter 2 and 3 for some of our major OEM customers in medical and some of the big OEMs to consume their stock. But on the other hand, as we mentioned, on the semicon equipment is getting rebound in Taiwan and Korea. But again, U.S. and Europe, we also see that the increasing -- even not the big rebound, but gradually increasing quarter-over-quarter. And with the expectation for a strong rebound in quarter 4 in 2024 in these 2 major region, especially in the semicon industry. And as for the SIoT, SIoT focus on the retail health care and hospital also logistics. Most of the customers in this sector are also the large key accounts, not the small like general customer or channel. So for the USA, the key accounts are still slow due to the existing stock issue. So I think in USA for SIoT we might have to wait until a little bit later until quarter 4, like to get the shipment to taking -- with really like increasing rate. But for most of the project base, we actually monitor on the design win status. So in U.S.A., the design win still is going very well. In Europe the health care and for SIoT, we expect that slightly better than quarter 1. But compared to last year, Y-o-Y may still face some of the low double-digit decline. Yes. So here's the feedback and some color for the SIoT and the overall update for USA and Europe.
Thank you, Linda. So for the third question, investors would know that Advantech collaborate with the Qualcomm in the embedded business, especially in the edge computing for the semiconductors or the EV areas. Investors are keen to know could management provide some thoughts on the company's strategies or the business plan within the edge computing from the industrial side?
Okay. This is Eric speaking. Let me try to answer this quickly. The cooperation with Qualcomm mainly has 3 aspects. Firstly is the technical cooperation, which includes at Qualcomm edge AI, edge computing and wireless connectivity technologies. And the second is the product cooperation [indiscernible] Qualcomm [indiscernible] top notch solution into our embedded AI modules, AI functional [indiscernible] and edge AI systems. And lastly, there is cooperation in application fields, especially in medical, industrial automation, robotics and retail. I think the partnership [indiscernible] and to drive continuous innovation and expansion in edge AI devices for the [indiscernible] IoT [indiscernible]. So this is what we cooperate with Qualcomm in the embedded business.
Okay. Thank you, Eric. So for the fourth questions from the subsegment, investors also would like to know for the emerging market, the momentum seems to be a bit slow down to the management comments on the current order visibilities or the vertical opportunities.
Thank you. This is Linda again. For the emerging market opportunity, I would like to share the 2 portions. One is about the green business, and one is about edge AI. For the green business, we are talking about for the green business on EV car and ESG. So while the sales of the EV car in the major country appear to be slowing down in 2024 compared to strong growth in 2023, some of our clients remain committed to global expansion effort for the EV battery factory, especially for our customers in China and in Korea. And so EV battery and energy storage was still the very emerging market, and we see the growing trend growth rate from us. And given the designing cycle typically takes 6 to 12 months, so the visibility of the order depends on our customer validation, readiness, installation schedule and sometimes related to the regulation in each country and also some of the benefit from the government. So we are already receiving some order for the EV battery factory in North America, Europe and Asia, South Asia and primarily from the customer in South Korea and China. In addition, for the energy storage, the design win we have for the global Tier 1 battery energy storage manufacturer where we design win in 2023, but now we have secured some different order that will extend through the quarter 3 of 2024. So that will be the emerging market update for the green business related application. The other one is for the edge AI, edge AI is where it could happen in different verticals and is the emerging market with the growth potential. And we do find the increasing query from vision-guided robot, traffic management, health care, safety and security and, of course, smart manufacturing. And individual project size may not always be substantial, but project inquiry are more than 40% growth compared to last year. And this is because our cost collaboration with ecosystem partners, including NVIDIA, Qualcomm and China maker, Huawei, and also very important is the global AI software partner, and they specialize in different vertical applications. So in addition to the edge AI within Advantech we also integrate GenAI into Advantech-wide software solution. In the past, we only provide users with visualized dashboard but GenAI now empower the user to pose a specific inquiry and telemetry require. So we plan to launch GenAI in June. So for the emerging market at GenAI, because this is very fragmented in different vertical, it might take longer time to bring up because it's difficult to duplicate from one application to the other application. But this is definitely is a growing trend that we are working on. Yes. So here is an update and sharing for the emerging market and some of the solutions and the go-to-market strategy we have. Thank you.
Thank you, Linda. Very clear. Then we will jump into the third section of the questions, the longer-term strategy and development. I think some of the investors also are keen to know the current update on the new MA plan this year and especially you and the management just released a new acquisitions of the Aures Technologies last Friday. Can management provide some updates on this acquisition? Thank you.
Thank you, Sheng. This is Grace speaking. I think question 3.1, including 2 parts. First of all is our M&A plan this year. Well, actually, Advantech the past 20 years, we enjoy top line CAGR, about 10%. This is mainly driven by organic growth. Going forward, not only this year but also until 2030, we try to reach our 2030 goal in the future. So we hope in the future, our growth -- our future growth will come from new engines, including organic growth and also M&A. Therefore, Advantech's, our investment rationale would be like a value creation rather than pure financial investment. So we try to maximize the synergy between Advantech and also the counterparts. So including maybe in technical-wise or product line-wise or region or channel partners. So we try to maximize the synergy for the old parties. That is our M&A going forward. And second part, for the Aures acquisition, we just announced the acquisition of Aures in last Friday after the Board approval. So I will share more details about this case. First of all, Aures is a French listed company and also a global leading brand in POS and the kiosk industry. So Aures has also established a very strong presence for the POS equipment in Europe, Australia and also United States. And this acquisition deal aligned with our corporate strategy sector driven. So in the strategic purpose, we aim to strengthen Advantech's global coverage in smart retail and also ICT services sector. So the collaboration of Advantech and also Aures, A plus A, multi-brand holds a very promising synergy and also results in the win-win situation. We're targeting for a top 10 high-retail branding globally and aiming in the long term, aiming to the top line in the future. So the deal structures like this, part one, we will acquire Aures' shares through transactions with the major shares, including founder, and also public tender offer at a pricing per share [indiscernible] EUR 6.7 and up to 100% shares. And for the second part, we will subscribe Aures' convertible bonds totaled EUR 5 billion to support its working capital as Aures will be independent operate in the future. So the deal will be based on Advantech's own capital. We have no funding plan accordingly in the future. So that's my answer for the question 3.1. Thank you.
Thank you, Grace. Very clear. So for the last question, 3.2. Investors would like to know have management seen raising demand from the industrial platforms, i.e., IoT and edge AI recently? Could management share some updates on the contributions from these 2 sectors?
Okay. Thank you for your questions. Over the past 3 months, there has been an uptrend demand for [indiscernible] IoT, especially for [ IEM ] and [ IFF ] solutions. Most customers [indiscernible] are in China, Taiwan and [indiscernible] IoT has grown by 16% year-to-month 16% year-to-month. Regarding the edge AI platform, Intel and AMD AI solutions are widely adapted in IIoT, EIoT and SIoT products. For the NVIDIA solutions will be mainly delivered by IIoT and ICVG SBG or other AI solution partners such as Qualcomm [indiscernible] and et cetera. The IoT [indiscernible] primary partner in institutes [indiscernible] solution to our embedded -- both embedded modules and embedded systems [indiscernible] performance for the edge AI performance is around 80% accounts for our 4% of our total revenue. And the CAGR for the edge AI is around 36% for the past 3 years. So we can foresee the edge AI demand [indiscernible] in the past 3 years. So this is my update regarding the [indiscernible] IoT also the edge AI adoptions. Thank you.
Thank you, Eric. So we have finished the first prepared questions, and then now we will go into the second part of the Q&A session. For the participants, investors who want to ask questions, please use the raise-hand button. Please wait for your name to be announced and then mute yourself directly and ask questions. Alternatively, you can write questions in the chat box and send to me. We will go through that shortly. Thank you. So while we are still waiting for our first questions from the floor, I have a question for Linda. "When, Linda, you mentioned that Advantech actually started preparing some China-to-China products. I wonder if you could provide us some colors on the current selling price for Advantech with the local price? So if the gap is actually shrinking especially when we are using the Chinese semiconductors?"
Yes. Thank you for the question. So when we say China for China, the product, of course one is the product we designed with Chinese silicon. But I have to say for this kind of the demand of China silicon is driven by the government, maybe on the military, they will secure some infra. But the demand is not increasing as much as we expected. But on the other hand, we move based on the competition on the regular product we have [indiscernible] with Intel, AMD or Arm. So that is the one. So for those China-for-China product that -- because some of the product requirement or the IO is quite different than global product. So we are defining some China SKU with just enough feature to feed the customer. And of course there's still a gap, even though it's China-for-China, because what we're competing is really the 2 China maker, it's now that what we know is the Taiwanese IPC vendor that like [indiscernible] because China price is getting very competitive. And the price gap in the high, maybe 10% to 15% compared to Advantech. So what we are doing is that we are not just going not just compete the customer, compete with them with the price, we also do some of the action of some of the transfer some of the production lines from Taiwan to China or provide some of the most cost-effective solution. So on some of the key customers, the big customer, the ASP in China could be reduced. -- but we only go for the selective strategic key account for price competition. For our flow business of the channel, the general account because the service we provide, and I believe our margin [indiscernible] little but degraded, but still not too much. So in general, in China, the margin is lower than what we had in the past but not too much because it's only to the selected key account. Yes.
Thank you, Linda. So I think we are -- haven't received other questions from the floor. I have a follow-up for the -- another question for Eric. Eric, I heard from you saying about there is other like leading indicators instead of the B/B ratio, which is design win and design -- the ratio between the design in and design win. Could you provide us some of these statistics for us to get you about the current demand globally?
Yes, we actually have indicated core design win and design in, especially we have not indicated [indiscernible] new design wins, which means that new customers and the new project [indiscernible] net new design win. According to our presence, our country head in the U.S. [indiscernible], we have almost 170 about -- millions design win this year. And perhaps last year, we have almost 300 million design in and design win projects. So this require optimism about next year's almost for the U.S. This is for the U.S. situation. And for the Europeans, the current design in and design win indicator is not so strong. It's a little bit break compared with last year. So this is what I can tell for these indicators. So this is quite important because normally in Advantech each project will elect for around 3 years. The design win and design in indicators can [indiscernible] at least for 2 or 3 years. Yes.
Thank you, Eric. I have a follow-up on the B/B ratio. So actually we could see from the past 2 to 3 quarters, actually we are seeing sequential growth on the B/B ratio from 0.8 to current 0.97. I wonder if the rising trend is actually driven mainly by the lower shipments? Or how should we interpret the sequential growth for the B/B ratio? Could we interpret it as going in the next few quarters? Actually we could see the better revenue momentum in the following quarters.
Yes. Not really because if you look at the months from the third quarters last year is around USD 386 million. But for this year's the quarter 1 is up to USD 428 million. So from the booking amount point of view, it's still in the uptrend. Yes.
Thank you, Eric. Again, so if you want to ask questions for the participant investors, please use the raise button -- raise hand button. Please wait for your name to be announced and then unmute yourself and ask questions. Alternatively, you can write down your questions and send in through the chat box for me. I will help to go through the questions for you. I wonder if there's any questions from the floor. If no, then before we conclude the call, I wonder, Eric, do you have any closing remark for the investors?
Yes. This is Eric speaking. We did not perform quite well in the first quarter also for the outlook of the second quarter. The guidance is still in a low -- is still in a low rate. So but for [indiscernible] I think Advantech has [indiscernible] sector-driven project. We are trying to make the transformation from the partner-driven company to a sector-driven company. And right now we started trial run in the automation sector. And the design in sectors worldwide. So maybe for another 2 or 3 quarters, we can foresee the key results after this key transformation from Advantech. So please be patient. Yes.
Thank you, Eric. I think we will finish all the questions for today. And thanks for everyone's participation. And I will conclude the call here. Thank you, everyone, for the participation for the Advantech's First Quarter 2024 Result Call. And hope to see you guys next time. Thank you.
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