Hello. Good afternoon, everyone, and thank you for joining us today for YAGEO's Third Quarter Results Webcast. YAGEO is the world's largest supplier of chip resistor and tantalum capacitors, as well as a top three supplier for MLCCs and inductors. My name is Howard Kao, and I'm the coverage analyst here at Morgan Stanley. We are again very honored to have Mr. David Wang, CEO, Mr. Eddie Chen, CFO, and Mr. Claudio Lollini, Head of Global Sales and Marketing of YAGEO here with us today, and we look forward to their insights and comments on the company as well as the market. The management team will first guide us through YAGEO's third quarter results, as well as provide some forward-looking commentary, and after that, we will open it up to Q&A. At any time during the webcast, you can send in your questions in the text box on your screen. Now I would like to turn it over to YAGEO's management team for opening remarks. Okay. Howard, I'll just go straight into the presentation of the third quarter financials. Basically we experienced another stable quarter performance groupwide. If you look at the third quarter revenue, it comes in at about TWD 27.4 billion, slightly up about 2.4% quarter-over-quarter. Obviously the FX helped a little bit, otherwise we're kind of flat on that top line. If you look at gross margin, we're pretty stable compared to the previous quarter as well. We're quoting that gross margin percentage at 33.2%, which is flat from the previous one, or about TWD 9.1 billion. OpEx is slightly down in terms of OpEx dollars, about TWD 3.7 billion versus TWD 3.8 billion in the second quarter. 13.6% versus 14.2% is a slight improvement, obviously because of the slightly higher sales in the third quarter. Better performance on the operating profit lines. 19.7 or about 20% operating income margin, or about TWD 5.4 billion. On a non-op, another stable performance in the third quarter, we netted about TWD 900 million, slightly lower than the previous quarter, obviously because of some FX position change, but still a bit credit there. The income before tax come in at about 23%, about 1% down from the previous one, because of the lower non-op. Overall, still pretty successful third quarter. We netted about close to TWD 5 billion on the net income. You notice that the income tax this quarter has come back to the normal level, largely because we don't have the retained earning tax that accrued in or expected in the second quarter. The EPS for the third quarter comes in at about 11.6 TWD per share, compared to less than nine TWD per share last quarter. EBITDA, stable at 27.1% or TWD 7.4 billion. Of course, if you compare to the third quarter last year, still struggling in terms of the slower macro environment. You've noticed that the net sales come in about 11% lower than the previous year. Gross margin as well, we had about 38.5%, but then this year we've been holding around that 33% level since beginning of the year. OpEx, well, while we can try to maintain the operating expenses, but then the percentage quarter-over-quarter, year-over-year is at 13.6%, but then the momentum's slightly different there. The spending OpEx this year obviously is a lot lower than the actual OpEx spending last year, third quarter. I won't go in for the rest of the items, but basically I think the performance versus last year is still suboptimal. Next page. Right, here's a look at the year-to-date performance. Year to date, we net in about TWD 80 billion on top line. That's about 13% down from the previous year, same period. Gross margin, again, as I said, I mean, 33% versus 38.5%. That's a 5.4 percentage points down from the previous year. The OpEx dollars year to date about TWD 11.2 billion, so that's lower than the TWD 12.4 billion spent last year. But percentage wise because of the lower sales, it is slightly higher at 14% versus 13.5% in last year. Operating income, 15.4 billion TWD or 19%. Non-op this year because of the strengthened U.S. dollar, so we kind of benefit from that appreciation of U.S. dollar across major currencies. We had about TWD 22.7 billion non-operating income this year. Net income at TWD 12.8 billion or 16% net income margin, and EPS cumulative basis up to September end is at about TWD 30.43 per share. So far this year we have accumulated TWD 21.5 billion of EBITDA or 26.7% EBITDA margin. Next. If we can look at the dynamics of the sales by different features. If you look at the sales mix by product, you see that we haven't really had any structural change in terms of the mix across major products. Quarter-over-quarter, we see some different momentum there. We're seeing, for example, resistors, tantalum are both experiencing a pretty decent growth in third quarter versus second. Yeah, and the others are sort of holding back a little bit. Net-net, we're still seeing that quarter-over-quarter revenue growth of about 1.4%, as I alluded earlier. If you look at the region mix, quarter-over-quarter, we're seeing some momentum coming back for U.S. and China-based customers. We're seeing a bit of growth there. Non-China Asia, Japan, and Europe are still somewhat below the guiding curve. On channel side, basically we're seeing the mix still maintained, but then in terms of the revenue growth from direct sales seems to be improved a bit quarter-over-quarter. If you look at the segment, I think we're seeing some improvement of the momentum quarter-over-quarter on auto, on industrial, on communication as well. Computer and consumers are still somewhat struggling a bit there. Next. Right, here's a quick look at the balance sheet. Well, basically a very solid balance sheet movement. Basically, you see that the cash balance continued to improve because of the group's EBITDA dollars will continue to generate. Cash balance comes in at about TWD 82.6 billion as of the end of September. Inventory level comes up a little bit, TWD 25 billion against the previous quarter. If we annualize that quarter, I think we're probably at about 126 days in terms of the inventory turnover. I think the inventory digestions continue to be in progress. The market is still challenging, but then I think we managed to contain the growth of inventory to a much healthier level. If you look at the gearing, you can notice that the company continued to improve its liquidity and the use of gearing. The definition of debt to equity is at about 8.3%. That compares to 11.3% last quarter or 17% third quarter last year. It's quite an improvement there. If you look at the net debt to EBITDA, that again shows the similar trend. We're currently at about 39.2%, versus 45.6% last quarter or 55.7% third quarter last year. ROE, if we look at the third quarter at about 3.7%, if we annualize that's about 13.1%. That's also an improvement from the previous quarter. Next. I'll leave David to comment on the fourth quarter guidance. Okay. Thank you, Eddie. Again, welcome and thank you to participate in this conference call. In the next couple minutes, let me first give you a very high-level next quarter outlook, then supplemented by a couple of things that we see in the market. As you can see from the screen that we estimate we forecast the Q4 next quarter, the revenue will decline in mid-single-digit% comparing with the last quarter, the third quarter. In terms of gross margin% and the operating profit%, we forecast that it will be flat quarter-on-quarter. Actually, a couple of things that we see in the market. First, we see that we believe the Q4 next quarter and also the Q1 2024, that should be the bottom of this business cycle. If there's no unexpected macroeconomic or geopolitical issues, then we expect the business will gradually improve in this industry starting quarter two next year, 2024. Currently we see the end market, especially in consumer segment, like mobile and notebook, has reached its bottom, and now the demand is quite stable. The channel inventory correction, that's still continuing. Definitely in the last couple of quarters, that has been a very positive trend. We see they do have the improvement. However, we see It might take another 1-2 quarters to end this inventory correction. Anyway, we see the trend is positive. In terms of our sales, we see the average book-to-bill ratio is one, especially in the commodity segment, commodity product. BB ratio has been improved from below one now to around one level. In general, after almost six quarters of very slow momentum in the market, we see today the business development trend is in a positive way. Internally, what we are doing still will be, in the next couple of quarters, to continue our new product development, and very important to follow closely with the AI trend. Still, the strict inventory control and cost control is still our main task. Lastly, in terms of utilization, in order to control the inventory, basically there will be no fundamental change comparing with last quarter. For commodity segment, this will be around 40%-50% utilization. Howard, this is the end of my business outlook. Thank you. Great. Thank you so much for that, David and Eddie. I guess now we will move into the Q&A session. Again, as a reminder, please send in your questions in the text box on your screen, and we will get to them shortly. While we wait for more questions to come in, maybe I can ask the first question. I think this is probably on top of mind for most investors, and we've seen a few announcements regarding, you know, your capital injections into some of your European subsidiaries. My question is, when can we expect the Telemecanique Sensors deal to finally close? You know, how much do you think that will help contribute on both the top line as well as the bottom line? Thank you. Yeah. Well, I think in terms of timeline, it has always been scheduled to consummate the transactions in fourth quarter. We're in it right now, so honestly we are in a very final stage of cleaning up some wrinkles, if you will. Pretty close. I can't be very specific on that yet, but it's coming very close. As you can see the movements there, that's really trying to get us really prepared for the final closing of the transaction. I think Telemecanique, as we talked last year, it has always been a pretty accretive transaction to YAGEO. Basically, I think it showed a pretty positive gross margin percentage compared to what we have. Again, a very specialized segments to be in that adds on, you know, a great help on the portfolio for YAGEO overall. Then, you know, just a month or two performance for this year is gonna help, but then it's kinda going to be pretty marginal. I think a big part of the impact will be from 2024. Great. Thank you. Can I just one quick follow-up on this, you mentioned that it is accretive on the gross level. Can I just ask, what about on the operating level? Is it also accretive? Yeah. Even if we look at the EBITDA margin, it's pretty close to where we are. I mean, we're probably in the same band. Same thing. I think that's pretty solid thesis that we have, right. Got it. Thank you so much, Eddie. Yeah, sure. All right. We'll be taking some questions online right now. The first question will be on, "Can you talk about the end demand for each of your business segments?" I'm assuming this is referring to, you know, by product, MLCC, R chip, et cetera. Yeah. Yes, Howard, I can add some color to that. In general, if we look at the customers that are still growing year over year, for us, you will find mostly automotive and industrial and medical accounts. With some exception, but for the most part, I would say that nine months into the year, that's what we see. On the other side, if you look at the customers that are still declining year over year, after putting together the first nine months of the year, most of those are computing related. When I say computing, I mean mostly on the notebook, laptop side, smartphone, telecom, and telecom infrastructure. One exception on computing is the server piece that is still growing. Product-wise, you know, our product has a broad mix used in a variety of applications. Not big changes. Maybe recently we saw a little bit of a pickup in smartphone. There has been some improvement, to some extent, in notebook. Nothing significant, mostly seasonal. We don't expect a lot of dramatic changes moving forward, at least for a quarter or two. Got it. Thank you so much for that. On your comments on smartphone, there's a question here that is asking if you guys are seeing increasing demand from foldable phones and, you know, whether YAGEO will be, you know, well-positioned to benefit from rising demand for foldable phones. Foldable phones? Just wanna make sure I got that one right. Oh, foldable. Right. Foldable, yeah. Yeah, I mean, we have a presence in the AVL for smartphone. I can't say it's our dominant segment. We mostly have I think the area where we have a bigger presence is where the computation power is higher, so notebook, laptop. Certainly we will benefit from growth on smartphone. We don't see a significant difference between foldable and non-foldable. Got it. Thank you. There's a question here on automotive. The question here is, it looks like you guys did well in terms of autos in the third quarter, but there are some peers and other companies out there that expects automotive to be weaker in the fourth quarter. How should we think about YAGEO's automotive business in Q4? Thank you. I would say historically Q4, Q1 always have an effect on the long Christmas holidays, especially in Europe, which is a very automotive-driven market. We've seen some program that may be rescheduled a little bit as we enter next year. In general, if we look at the development of automotive, EV in particular for the year, so far it's been quite good. We've done very well. Looking forward, we stay fairly cautiously optimistic, I would say. Nobody dispute the long-term trend and the positive impact that the EV will have on the electronics. There might be some slowdown in between. We think that Q4 and Q1 will not have significant changes with what we've seen so far. Certainly not an acceleration on the business. That's for sure. Got it. Thank you. There's a question here on your guidance for Q4, and basically just a clarification on whether this includes the acquisition of Telemecanique Sensors or not? No, this does not include Telemecanique Sensors. Got it. Perfect. Thank you. Another question here on end demand. I think this is referring to the third quarter where you guys saw slightly better demand from the U.S. market. The client was wondering what kind of demand this is for? The U.S. market for us is broadly served by distribution. We do have presence in industrial, automotive. Computing is less present in North America, so we benefit from a broader improvement from the channel, which in the U.S. accounts for a significant portion of our revenue. Got it. Thank you. A question here on your BB ratio. I think, David, you mentioned that it's, you know, commodity business, book-to-bill ratio is now back to about one. The question was, you know, what was it back in the third quarter as well as the second quarter? Back to second and third quarter, that's slightly below one, but not far away. Got it. Another question here is on your order backlog for your automotive as well as your industrial business. Is there still backlog for these two segments? If so, when can we expect these backlogs to clear out? We do have significant backlog for automotive and industrial. Not unusual, quite frankly. We typically have longer term forecast from our customers. We have yearly negotiations. Some of them tend to place orders quite in advance. I don't expect that backlog to drastically reduce. We've been consuming that backlog as lead time relaxes. I think we are in a quite healthy level now, but we don't see that backlog eroding further too much. Got it. Thank you. In terms of utilization rate, I think, David, you mentioned that utilization rate is expected to be flattish in the fourth quarter, commodity at about 40%-50%. Can you talk about the utilization rate for the premium segment in Q4? That will be still the same level as the previous quarter. I think that's around 70%. 70, yeah. 70%. There's no significant change. I see. Is there any color you guys can provide for how we can think about the utilization rate going into Q1 for both commodity as well as for your premium segment? First, I think it is still too early to say. As indicated, we see that the Q4 this year and Q1, these two quarter might be the bottom of this business cycle. Maybe the best guess will be similar level to Q1. I see. Got it. To just follow on to that comment, you guys obviously will have forecasts from your customers, but is this comment mainly driven by your view that channel inventory digestion will finish or come to an end? Even if demand does not improve in a substantial way, just that normalization in terms of sell-in to the channel will lead to a better outlook. Would that be a fair statement? Yeah, I think, Howard, eventually the answer is yes. Obviously, the unknown factor here is what end demand will look like also for the channel. What we've seen from the data we gathered is the end demand from the channel contracted year-over-year as well, but not as much as we did because we have to discount the effect of the inventory correction. That's encouraging. Based on the current pace of inventory depletion, we estimate another 1-2 quarters. With everything else unchanged, then yes, in a couple of quarters with the inventory being in a better position, if end demand is still whole and no significant change on lead time, or if lead time contracts, we expect the channel to start refilling their orders and improving their bookings to us. Got it. There's a question here, more near-term in terms of your Q4 guidance of down mid-single-digit quarter-on-quarter. The question is, for what segment are you guys seeing a slightly larger decline, sequentially? Seems like consumer electronics is improving for smartphones and for maybe PC, including notebooks. You know, which segment is driving that sequential decline? I think it's spread. We have long holidays out of Europe. We have, in general, computing and notebook segment that is suffering from weak market in China and Europe area. Can't say I can pinpoint a specific segment that is driving that contraction. Got it. Thank you. On pricing, can you talk a little bit about the pricing trend on a like-on-like basis for MLCC? You know, how has pricing been trending, and how has competition looked like over within the MLCC space? Yeah. From what we see from our side, pricing has been relatively stable, even for our commodity business, and definitely stable or more stable for our premium business. This has been the case for already about a quarter or two. Can't really comment much on competitors or what they do, but for us, that's mostly flat. Got it. Thank you. Here's a question on margins for Q4. What are the reasons for margins to remain flattish while revenues are declining? I think this is the general effort because of the channel mix, also product mix, also the cost control. That's why we are able, as you see in the last couple quarter, always in maintaining a very stable level. Got it. Thank you. There's a question here on the seasonality. The question is, looking across the past 10 years, fourth quarter revenue tends to be down about 10% sequentially, but Q1 will be up high single digit quarter on quarter. The question is, why is Q1 or why do you think Q1 will be the trough and not Q4? Inventory is a big unknown. I think the level of inventory that the channel accumulated globally was pretty high compared to the average that we've seen in recent history. Typically in the past we've seen that before. I have to say, we've seen an inventory correction much sharper and faster unlike this time. I think this time the inventory was very high post-COVID post shortage of semiconductors. Especially on the passive, it reached a level that was quite unhealthy, I would say. Compounded with an end demand that declined, China market not doing so well. All of these factors together made for a longer than expected inventory correction. Now it'd be premature to say that the seasonality for Q4 or Q1 next year will follow the typical trend, right? We have factored this specific event in it. Got it. Thank you. For your resistor business, revenue seems to show a pretty good quote-unquote growth in the third quarter. Was there any particular end segment that was driving this growth? For resistor, maybe a couple of comments. We've been working really hard on positioning our roadmap more towards automotive. YAGEO had already a strong automotive offering, but the acquisition of KEMET helped to open up and accelerate and facilitate those conversations with the automotive OEM, where KEMET had a very large presence historically. We're starting to see some of that result. Distribution, in particular in Greater China for resistor, worked very diligently to a faster inventory correction, which led to some new order coming in, so that's another factor. Some end demand pickup compared to Q2. A mix of these three factors helped to boost sales for resistor in Q3. Perfect. Thank you. Another question here on BB ratio. You commented on the BB ratio for your commodity segment. Can you provide some color on the BB ratio of your premium segment? I think that's. Yeah, because on average we are around one. Yeah, for the premium segment is also minus and plus one in that level. Got it. Thank you. A specific question on the utilization rate of your tantalum business. Can you talk about where utilization rate is now, and can we expect this part of the business to see a more meaningful utilization rate improvement? Our tantalum business largely supply to notebook. Notebook is the important segment. In tantalum in the last couple quarters, I think the utilization is between 60%-70%. We think because of the notebook segment, the demand now is stable, but not that strong yet. We expect the utilization will remain the same, at least in this quarter or next quarter. Got it. Thank you. Right now I think a lot of PC brands are talking about AI PCs. Is this something that would require more passive components? Certainly any device that has an AI component to it translates into high computing needs. Anything that translate into higher computing needs requires a higher number of electronics and passive components. While we cannot distinguish a passive component that is used for an AI application or not, we certainly have a portfolio that is geared towards facilitating and accelerating computing, computational power. The short answer is yes. If there is such a thing, we'll benefit from that. Got it. Thank you. This question is here on currency. With the weaker yen, does this lead to a more competitive environment in the MLCC space? Are you guys seeing any impact from the weaker yen? Well, from our operation, basically it has been somewhat neutralized in the sense that we're operating in Japan. We do have that the FX impact coming in, not just on the top line, but as well as on the expenses and costs. The net impact is probably not that dramatic to us. Putting that in our overall portfolio, I think the net impact on the group performance is somewhat limited, put it this way. I can't comment on if you're asking about the currency effect on other MLCC players. I can't comment. I don't know, honestly. I don't know about their cost structures or their structures. For us, I think the impact is manageable, it's limited, somewhat neutralized. I see. I guess the question, if I'm reading it correctly, I think it's probably a little bit more geared towards, you know, maybe your competitors in Japan would be a little bit more competitive on pricing. Or are you guys seeing that coming through? If I look at our MLCC performance, you know, periodically, I don't sense that dramatic change to its competitiveness. Put it this way, I mean, well, we do see some improvements quarter-over-quarter because of the capacity that we're adding, because of the improvements that we're seeing on the operations front. No, I don't see us particularly putting it in a disadvantageous position because of that currency effect. I see. Got it. Thank you. There's a question here on APEC. Any updates on APEC and what you guys are doing with the MOSFET business? Well, again, well, for that MOSFET business is probably more related to the investee companies that we put in. I think it's still in the alignment stage super well. I don't sense any particular. Well, lots of momentum building up there, of course. But then in terms of the overall financial performances, we're just one of the major shareholder, obviously. We're monitoring that. So far I think there isn't much update on that front. Obviously, I think we're trying to collaborate on the product front, the sales front, and see how we could put in more resources to support the growth there. That's as much as we get. I don't know if Claudio wanna comment on that one. I would just add that, you know, we have this relationship now with APEC, who is collaborating with us on providing products. We are, as Eddie said, we are still in the discovery phase and defining the product, the roadmap. We have stocking packages, I would say, that has been defined and either shipped or on the way to be shipped or delivered in some case to our global distributors that mostly operate digitally, which are Digi-Key and Mouser to name the two. We expect these activities to help generate AVL adoption. As you know, YAGEO has a tremendous channel, tremendous presence in key OEMs across a variety of segments. It'll take some time, but we are confident that next year will be a significant year for boosting operations and customer contacts and conversations. Quite excited about that. Great. Thank you. There's a question here on your MLCC capacity in Kaohsiung. I think it's been some time since we've got an update on this. Any color on when we can see this ramp up? Well, they are in the final ramp up stage, so everything goes smooth. Certainly because of the softer market demand, the utilization currently is low. We do expect that in Q1 or Q2 next year, we're gonna see some more significant quantity increase there. So far, the engineering work, the production ramp up goes very smooth. Got it. Thank you. Can I just circle back to Telemecanique Sensors? I think in the past we've seen from the acquisitions you guys have done, you guys have been able to see synergies quite quickly post-completion of these deals. Is this something we can expect as well, maybe to see synergies flow through in, I don't know, one or two quarters' time? Well, I think the sensor business for us is relatively new, so it might take a little bit longer. We do expect synergy like the channel, since we have the distributor that we can utilize that channel to sell, to cross-sell those kind of product. In terms of the operation, still when we really have this closed, then we will spend some time to see where we kind of, where we can find the synergy. In the last 2-3 years, the experience with Pulse, KEMET and Chilisin, we have high confidence level. This is a kind of a common practice for us. Still, it would take a little bit time. Let's see. Got it. Can we expect you guys to start breaking out a sensor business revenue segment starting from Q1 next year? Yes, we will. Yeah. Got it. Thank you. Thank you. Maybe one last question here on margins. It seems like you guys, even in a very, very tough and challenging macro environment and demand is weak, seems like margins are stabilizing at, you know, slightly north of 33%. Q4, you guys are guiding revenues to be down sequentially, but margins flattish. Essentially, you know, is this basically the bottom in terms of your margins? And when can we expect margins to improve more meaningfully? And do you have an idea of when it can get back up to above 40%? First, yeah, the 40% gross margin, that will be always our mid-term goal. But how fast and how much we can close that is pretty much depends on the two things. One is the revenue, the other one is the utilization. As we indicated earlier, these two quarters will be the bottom, I think because of the cost control or the mix management, we are able to maintain the flattish gross margin percentage. But when the revenue starts to improve or when the utilization start to improve, certainly that will help the gross margin percentage improvement. But how much? I think that will be very much depends on those factors' improvement. Got it. Thank you so much. I think we've covered all the questions online. Maybe let me turn it over to you guys to see if you have any closing remarks before we wrap up this call. Yes. Thank you, Howard, and thank you for the invitation for us to participate in this conference again. As we say, in the last five to six quarters, they were really tough. We see the market remains very soft, the inventory correction. The good news is that we really see these two quarters, quarter four and Q1, should be the bottom of this business cycle. For YAGEO ourselves, our products and the capacity, we are ready. Whenever the market demand, the inventory correction ends, we should see some benefit from there. One last thing is Telemecanique. This year, their contribution will be limited because we will close that deal, I think in November or December, very close. This is very marginal. Next year, those two factors, one is the market improvement. The other one is Telemecanique Sensors. We do hope that next year we can see the growth. Thank you, Howard. Perfect. Thank you guys so much. Thank you everyone for joining us, and thank you again, David, Eddie, and Claudio for your time and for sharing your thoughts with us.