Hello. Good afternoon, everyone, and thank you for joining us today for Yageo's first quarter result 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 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 walk us through Yageo's first quarter results and also provide some forward-looking commentary. After that, we will open it up for questions. 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, Eddie and David for opening remarks. Please go ahead. Yeah, as usual, let me just start with the first quarter of financial results recap, and then we'll open up the floor for further Q&As. First quarter has been another stable quarter for Yageo compared to the previous one. You can see here at the top line for the company has come in at about TWD 28.5 billion, which is about 4.2% quarter-over-quarter improvement, that came in slightly higher than our guidance, which was low single digit growth. No major shifts there. Honestly, the market has been pretty stable in our application markets. There are no major movements from one sector to another. If any, I think the consumer sector seems to be warming up a little bit, so we've seen a bit of a momentum there. But other than that, I think the first quarter revenue has been pretty stable, even amid the long Chinese New Year holiday in February. On the gross margin front, we're seeing the gross margin declined a little bit by 0.7 percentage points, kind of flattish from the previous quarter. I think that's more or less in line with our guidance from previous conference as well. The portfolio has been pretty balanced from quarter to quarter. No major shifts from one category to another. On the OpEx front, you see the OpEx dollar at TWD 4.67 billion compared to 4.4 in the previous, that's because of an additional one-month OpEx from the newly acquired Telemecanique. Percentage-wise, 16.4% OpEx percentage of sales versus 16% in previous quarter, slightly higher there as well, but all in all, I think the operating profits came in at 17.4%, which is slightly better than our prior guidance as well, which we guided for - 2 percentage points, and we turned out 1.1 percentage points from fourth quarter. No, it's not changed much from the previous quarter. We net in about TWD 1.1 billion non-operating profits in the first quarter of the year. That gives us a net income of TWD 4.6 billion, pretty flat from the previous quarter as well. On EPS, you know, TWD 11 per share in the first quarter, slightly down from the previous one. EBITDA TWD 7.27 billion, slightly better than the previous one, 25.5%, also slightly lower than 26.4% in fourth quarter. All in all, I think quarter-over-quarter has been another stable performance for the group. The performance versus first quarter last year, obviously because of the newly acquired entities, the top line has gone up by about 9.2%. Gross margin has improved slightly as well from 33%- 33.8% in the first quarter this year. Next. Looking at the sales breakdown for first quarter, note that for first quarter, we've done some modifications with regards to the way we presented the mix. We promised that we will single out the sensors business group, which is a very strategic important elements of our activities in the past couple of years. As you can see here in the first quarter, the sensor represents about 12% of group sales. Whereas MLCC came in at 20%, Tantalum 16%, resistor 13%. Magnetics is much bigger group, as we move some of the other components into this magnetics group. The piezoelectrics and some electrical elements of the relevant products that have been moved into this magnetics group. This is by far the largest application group for Yageo, representing 30% of the revenue. If you look at the region split, still very balanced portfolio, as you can see here. We have China about 23% of our total sales, U.S. another 25%, Europe 23%, and the rest of Asia is about another 29%. Very balanced portfolio, as we go along. Next. The sales breakdown by channel. For first quarter, we're seeing the exposure to direct sales inch up a little bit at about 41%. That is higher at the expense of slower or lower percentage from the global DC, which is at 39%, with some marginal decline as a percentage there. Largely because of the inventory digestion that's still taking place in the market. On segment-wise, we also made some minor revisions as well, just to hopefully to be in line, you know, to be more comparable with the general market practices. You can see here the consumers now represent about 11% of our revenue, and the computing and enterprise systems at about 21%. Things like AI or servers was falling under these categories. We have telecom at 9%. Industrial is a big part of our sales exposure, which comes in at about 36%. Auto is stable at around 20%. Next. Take a quick look at the balance sheet. We continue to expand the balance sheet, actually. The total assets at the end of first quarter comes in at about TWD 343 billion, up about 3.4% from the previous quarter. Cash balance higher at about TWD 84 billion. Obviously the business continued to generate good EBITDA. We're seeing the cash balance continue to get higher there. Inventory, as you can see there, in terms of inventory dollar, it's coming in lower than the previous quarter, representing certain inventory digestions still progressing smoothly in first quarter. Also TWD 26.6 billion, down about 2.2% from the previous. This is about 199 days in terms of inventory turnover days. That compared to 131-132 from the previous quarter. I think there's marginal improvements there as well. On the liability front, the net financial debts came off obviously because of the strong cash earnings over the quarter. We had a TWD 25 billion net financial borrowing compared to TWD 33 billion end of last year. We closed the transactions. You can see further down the net financial debt to equity and the net financial debt to EBITDA have all shown great improvements from the previous quarter at 18% and 86.4% Versus 24.7% in the previous quarter and at 1.15x in the previous. A gradual improvements on the balance sheet on gearing front as well. Flat ROE 3.4%, kind of flat-ish from the previous quarter. The ROE, if we annualize that, it's going to be around 13.5%, kind of flat from the previous on a year-over-year basis. Next. Right, I'll leave David to comment on guidance. Thank you, Eddie. In quarter two, first from the market, we see a couple of positive signs. First we see that the segment like computing or telecom, like mobile, we see slightly and gradually picking up. This is the first positive sign we see. Secondly, the channel inventory correction that still continue, but we see that is in a very healthy trend and also up to our expectation. The third one is that we see the artificial intelligence, AI, indeed is in a very positive trend. We argue, we believe that in terms of comprehensive product offering and also the designing capability, we are prepared to grow with this trend. When we see our own book-to-bill ratio is also average in around one. The Q2 guidance from the revenue, gross margin percentage, and also the operating profit percentage, will all give the low single digits increase. The last one is our utilization rate. I think the next quarter, this will be increased a little bit, but not much. Basically, it was similar to last quarter. Commodity-wise, it's still maintain around 50%. For the premium product, it's around 70%. This is the guidance we would like to share with you for the next quarter. Thank you. Thank you, David and Eddie, for those opening remarks. 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 start off with one question. Sounds like you guys continue to maintain the view that Q2 inventory digestion will come to an end. Now, when we look at your guidance and how utilization rate will improve, can you maybe walk us through what kind of improvement we can expect going into the end of the year? I think you mentioned 50% commodity in the second quarter, largely unchanged versus Q1. Can you talk us through how you view that improving or going up to what kind of levels by the end of the year? Howard, if you see our current inventory level, I think we still have very healthy inventory to serve the customer. The utilization goes with the demand. Basically we need to see what will be the demand increase in the third and the fourth quarter. We don't have that much visibility now. Whenever if we see there's a demand increase, then we will adjust our utilization rate accordingly. Got it. Maybe just one more from me before we move to the questions online. Just looking at your breakdown between distributor, EMS and direct sales, I think there was a very big increase on direct sales, and a double-digit decrease on the distributor side. Is there more color you can provide on the dynamics here, and what happened in the first quarter? Howard, this is Claudio. I think the major change you're seeing is from the channel that continue to de-stock. In Q1, that's just the same trend, maybe a bit more pronounced than other quarters, but no significant change for us in terms of strategy or our go-to-market approach. Just to build some color on the inventory sitting in our channel partner, in terms of dollars, it's the lowest value we had for the last 18 months, give or take. Obviously, end demand is the other factor, and it's been not as strong as maybe a year and a half ago. The trends are improving, not quite there yet. In terms of overall dollar, it's pretty healthy and or healthier. We see already some restocking activity this quarter in Q2. I expect that ratio to go back to what it used to be last year. Got it. Thank you. In terms of inventory digestion, there's a question online asking about whether there are certain segments or certain product categories that are seeing faster digestion versus others. Any kind of additional color you can provide on that side? Yeah, certainly. If we look at the geography even before the product, we've seen the digestion and the correction being a little faster out of Greater China as opposed to Europe and North America. Part of that is just because end demand in Greater China went significantly down before the other regions. They were the first one to drop and then the first one to pick up again. Within that, obviously our MLCC and resistor are the two leading product categories. Got it. Thank you. Maybe a question for you, Eddie. Here is one financial side. Is there any particular one-off items in non-op in Q1, or can we expect non-op to remain relatively stable for the remainder of the year on a quarterly basis? Well, there is some in first quarter. We did have some small divestitures of some investment in Japan. That comes in, I think into dollars probably by about $200 million or something. It's not a huge amount. Quarter-over-quarter, I mean, the number turned out pretty flat. Then I think we did manage the market on interest rates on the foreign exchange rate pretty dynamically. It just happened to be pretty similar level. I can't really project for the rest of the year, though. I mean, that continue will be a fluid situation going forward. I think with the team's capability, they've always demonstrated they'll be able to kind of like stabilize that non-op contribution. I'm still hopeful and confident that we should be able to maintain that pace. Got it. Thank you. A question here on your revenues coming from server and PC products. Are we able to break it out? I know you guys now combine it all together. If I remember correctly, it's 21% in Q1? 21%. 21%? Yeah. Are we able to break that out between server and PC? That would be a lot to ask. I mean, it's challenging, right? Yeah. Yeah, we don't. It's not just the server and notebook. For instance, there is SSD in there as well, you know, solid state drives and several other Certainly the major three could be SSD, server and anything that has to do with notebook, laptop and computer. We do not have a breakdown at the moment, Howard. I see. Is there like a maybe an easy way to think about it? Server previously in the fourth quarter was not part of this category, and now it is. So going from 16%- 21%, that means server is about 5% of your business? It's not the only movement we made. You know, we also moved some other categories across segmentation. I have to say part of the reason why the segmentation percentage changed also because we refined the model we have internally to segment the business. You know, we are in the component business. We have a trillion pieces of output and a long tail of customers. We try to segment revenues even beyond distributors. We try to look at the end customer and segment those. Whenever you tweak the model a little bit, you know, a few points move right or left. I can't confirm quite the percentage you had. I just wanna add more color on some of the things that drove that change. Certainly, server is a significant part of our business, no doubt about that. Got it. There's questions here on gross margin. The question is, with the acquisition of margin-accretive sensors business last year, can you talk about the reasons for why gross margin declined slightly in Q1? I think the main reason is Q1, we have a Lunar New Year. Usually in that particular month, the utilization would be lower, much lower than the normal months. That would cause the low gross margin percentage. Got it. Thank you. I think we all agree that, you know, Yageo is very well positioned in the AI space, whether AI PC or AI server. Is it possible, you know, to break out that contribution going forward, or is it going to be hard? 'Cause I think, you know, we would like to be able to hopefully track it on a quarterly basis to see, you know, how things are trending. You know, we ask ourselves the same question quite often, Howard. Not just because of the fact that we know the analysts are very interested, but you know, we are interested as well. Part of the challenge is the fact that at the component level, there is no AI graded spec. There is no consensus in the industry on what makes a certain component meet an AI criteria versus not, while that is true for automotive or for military specification, for instance. Just to add on the challenge, that also is true at the customer level. You have a variety of customers that are somewhat involved in AI, but you seldom have a customer with a couple of notable exceptions that we all know about. You seldomly have a customer that is 100% AI. When you combine these two factors, it becomes quite challenging to determine what percentage of your business or your products that are not necessarily AI graded do in fact contribute to an AI solution in that particular customer. What I can share with you is we have a few pieces of the business where we are very sure about the AI nature of that application and the final usage. Those are showing a lot of strength. Even in Q1, year-over-year, that growth has been significant. We continue to stay engaged with a lot of customers, a lot of design. We have a lot of products. That piece of the business is exciting. As much as it is exciting, it's gonna be hard to create a segment around it. Got it. Just to follow- up, I mean, all of this AI, the ones that you can identify as products going into the AI space, are these considered like margin accretive compared to the average margins for the company? Yeah. In general, we can say that the nature of those products tend to be more specialized designing. There has been a higher degree of development behind it. In general, we are able to extract a better margin compared to an average that we have. Yes. Got it. Thank you. David, can we come back to your Q2 guidance comment? Looks like you guys are expecting utilization rates to improve and revenues will be up low single digit quarter-over-quarter. Aside from margins improving because of high utilization rates, are there any other dynamics that we need to be aware of that is driving the margin expansion? I think first contribution certainly would be the revenue up, then yes, as you say, the utilization will be increased a little bit. Other than that, I think that's pretty much stable. Still we do have a very strict cost control. All this will contribute to the single digit margin contribution. Got it. If maybe just a follow-up on that, is it possible to assume that because you guys are continuing to be stringent on OpEx and controlling your expenses, that the improvement in terms of OP margin could potentially come in a little bit better than the improvement on your gross margin? Yes, indeed, because in last quarter, we explained to you that the newly acquired Telemecanique, we still have the carve-out cost that will be still ongoing this year. Also, they have a higher OpEx structure. But from our experience, the moment when we acquire the new companies, so we will spend some time to improve their OpEx percentage, also the OpEx spending. We will see that kind of improvement quarter-over-quarter. Second, certainly in the Q2, the operating margin, the operating profit improvement mainly come from the gross margin, but also slightly contributed by the OpEx. Got it. Thank you for that explanation. Now I have a follow-up on that. Just so when you think about the efforts that you guys are putting in because of these acquisitions, where do you think you guys are between 0 and 100%? You know, can we expect more of this in the second half, or are we all done by the first half of the year? I think this will continue for the whole year. You'll see the gradual quarter-on-quarter improvement. Got it. Thank you. I think last quarter, on the last quarter's earnings call, you know we talked about how the midterm guidance that you guys provided to the market a while back may need to be revised because of these new acquisitions, these new cost structures and things like that. Now that you guys have broken out the sensor business and reclassified a lot of the different end segments and product categories, I was just wondering if you guys have any updated kind of midterm financial targets that you can share with investors. I think, yeah, I think other than the quarterly guidance that we're giving right now, there's no major change of the overall sentiment. I think basically we've just netted in to important strategic acquisitions. It'll take some time for us to digest them, like, not only on the product or the mix front, but also on the operational management as well. I think that improvement will have to happen gradually over quarters. Apart from that, I don't think we have any major revisions on our general directional outlook. Basically, I think it's fair to say that the market is stabilizing, but then we're not really seeing any strong momentum in terms of recovery yet, which is the limited visibility into the second half. I mean, we've been hopeful that the second half should go well for us compared to first half. We maintain very optimistically conservative, you know, looking at market quarter-over-quarter. Got it. Thank you. There's a question here on your demand outlook for automotive and how that is trending. Do you guys see it improving or getting weaker? Thank you. We had a very positive growth last year, calendar year in automotive. I think we spoke about that previous calls. The segment grew significantly from Europe and North America, Greater China. Perhaps Greater China was a segment last year, automotive, where there was a little bit of slowdown. Today in the first quarter, we see the mix changing a bit. We also see in this particular period, automotive to put a few projects on hold pushing our demand a little bit. We saw the announcement of Tesla that was public a couple of days ago with their reduction in force. We see that. Now within that, the activity at the R&D level and new project is still very rich, and it didn't change our long-term view and sentiment around electrification. Certainly there has been some more cautious input from the segment in Europe and North America. I see. This is part of the reason why I think revenue exposure to Europe was down in Q1, I assume a lot of it's because the weaker automotive. For the segment, you mean, Howard? Yeah. The revenue exposure by region in Europe was, you know, I guess it was a bit weaker in the first quarter, and that's probably driven by a weaker automotive demand. Industrial. You know, European market has a very high component of industrial and then automotive. I think industrial is another segment that at the moment in Europe is a bit weaker than what it was last year. Probably we also need to look into the effects that the acquisition from Telemecanique Sensors has brought in that changed the shift a little bit, quarter-over-quarter. Got it. Thank you. There's a question here to clarify on where server was previously categorized prior to the inclusion into computer and enterprise systems. Yeah. We had the server mostly was in industrial before we moved it to where it is now. We had smartphone in computing, and that now is belonging to consumer. Those are two major changes. We had medical with defense aerospace, and now we isolated defense and aerospace like most of the industry does and moved medical into industrial. Those are some of the changes that we had. Got it. Can we just come back to AI real quick? There are a few questions here. So I know it's hard to break out, but when you think about the different kind of trends that we're seeing in AI on PC, on smartphones, on servers, where are you guys most excited about? Which of these three areas are you guys most excited about? Well, I can say the area where we've been most active, for the longest time and now is really taking off has been certainly, server data centers. That is an area where we have and also I would say, anything related to autonomous driving. Those are areas where we have been involved in, with our customers for several years. It doesn't mean that we are not excited about the other, pieces of the AI, but certainly the one where we developed the longest experience and the deeper connection with customers have been around, autonomous driving, for EVs and, data center and server, for sure. Got it. If we were to, you know, dive into this a little bit deeper, does that mean that you guys are most excited because you guys are growing from a lower base, or does that mean you guys are seeing the strongest content growth in these segments? The thing we are most excited about, to me, is that when I look at the customers that we engage with, those are the leading customers in their arenas. So we know that we are engaged with the right players. That is exciting. The second thing that excites us is that for certain products, we know we have a very competitive advantage design-wise. We are in leading position. We can see how those products, that could be our tantalum polymer or our inductor with NANOMET proprietary technology, those are solutions that provide an edge to our customer in those designs. Behind that, of course, it comes the fact that the overall consumption and usage of electronic components around those AI applications just increase. In the last couple of quarters or a year, we also established new engagement and new connections with customers, and we see some of these new projects kicking in in this next couple of quarters. You combine all of that together, we see this as a very positive trend for the industry, not just for us. Got it. Thank you so much. There's questions here on the recent earthquake that I'm sure all of us felt here in Taiwan. Were there any, you know, costs or impact to production as a result of that earthquake that we have to be mindful of? No. I think, there's no major damage to us, so everything under control. Now the operation is back to normal, already. No major impacts on us. Got it. Thank you. There's questions here on just, I guess, a clarification on your second quarter UTR comment for both commodity and premium. The last quarter, the utilization rate for commodity is around 50%, and for the premium, 70%. Next quarter, we will see this slightly increased, but not that much. I see. In the past, I think, you guys have provided the breakdown between commodity and premium. Could you guys please remind us what it is, what was the breakdown in Q1, and how did that change versus Q4 last year? In the UTR? The revenue mix between premium and commodity. Oh, well, overall. 25, 32. I think the mix hasn't really changed that much quarter-over-quarter, even since from last report quarter. I think we're about 25%-ish on the commodity. I think that ratio hasn't really changed much. We got a bit of a lift in the premium segments for last year because of the sensor revenue that we netted in. From that perspective, I think quarter-over-quarter, we're still around that level. Got it. Thank you. Maybe just coming back on OpEx. There's a question here on whether there are any OpEx targets that you guys have in mind that we, you know, you can share with us, over the next couple of quarters. I will keep it the same tune that for the time being because of acquisition mechanics, so there's a little bit higher OpEx structure from them. Also, we do have the acquisition cost, but then we will see the continuous improvement. Exactly the percentage target that I don't have the visibility now. I do believe that we will have a quarter-over-quarter improvement. Got it. Thank you. You know, as every quarter there is similar questions on pricing, so I'll just try to group it all together. Any comments on both premium and commodity pricing trends? I think maybe for some premium, you guys mentioned there is some weakening in industrials and automotive. Is that impacting pricing on the premium segment at all? Not really, Howard. You know, for those large platform in automotive, for instance, pricing is agreed beforehand, multi-year contracts and platform that you already have a pricing metrics that will kick in over a large number of years. We don't see any major changes or movement, pricing-wise, not in either direction, no. I see. There's a question here, I think, implying that some of your competitors may be cutting pricing. Is there any comment on whether you guys will also follow on the commodity side? For now, no plan to do so. Certainly, the commodity market, especially in Greater China, is very dynamic. It's something that, you know, we keep a close eye on and we'll react fast if we believe we ought to, but for now, no intention. Got it. Thank you. Maybe a little bit related to that, but so, you know, electricity costs may be increasing in the future. Does that put any pressure on you guys to have to raise pricing to your customers, or is that something that doesn't really impact your cost structure all that much? What was the raising the cost? Howard, the beginning of the question, can you repeat? The electricity prices. It depends. You know, we have. I think it's nothing new to the industry has to face in the past as well. You know, there are always components of cost that tend to rise, labor or other elements, energy. Certainly, energy recently has been more under pressure, electricity being one of them. We always try to counter that with other activities that are aimed to mitigate that impact. If we reach a point where those activities cannot sustain and we have to start a conversation with our customer and pass some of that cost over, then we'll do so. So far, we do not see anything major in that regard. Yes, indeed. This year in Taiwan, we do see the price increase, the electricity price increase, but we also have a couple of measures there. We believe we are confident to compensate those kind of price increase. You won't see a big impact from the cost or from the gross margin. Got it. Thank you. Here are some questions on your what you guys are seeing in terms of demand outlook on the smartphone side. I think in your opening remark, David, you mentioned that you guys are seeing some gradual improvement for both computing and smartphone demand. Just on smartphone specifically, any further colors you can share with us on your outlook here? Not particularly. We think that. 2023 was the year where smartphone overall contracted a bit. This year we see a smartphone to go back to growth below single digit. Nothing major, but certainly an improvement versus last year. For this year, do you expect the smartphone business to really just be a volume, kind of like a total smartphone volume story? Or will there be more, content growth that we can expect with more AI smartphone launches and model rollouts? Any new generation of smartphone comes with content increase. I remember we used to look at the content of MLCC just because it's so common. We used MLCC capacitor in any smartphone generation, and that always increased. With every new generation of smartphone, the content of MLCC used to increase steadily by a factor of 10%, 20% or 30%, depending on the release. That will not change. In terms of volume, we believe the smartphone will increase low mid-single digit this year compared to last year. Got it. Thank you. Maybe a question on inventory again, for you, Eddie. Can you talk about the DOI in Q1 inventory days? 129 days, if I remember correctly. That compared to 131, 132 fourth quarter last year. 129 in Q1 versus 131 in Q4. Got it. Thank you. A question here on shareholder return. I think last year the payout ratio was around 50%. Is this like the new normal for Yageo or can we expect this payout ratio to increase going forward? Honestly, I don't see it that way yet. We do have this shift in thinking that we put in place this year, which is why the higher payout. I think it's more of a reflection of current situations as opposed to, you know, a new dividend policy whatsoever. Take it as a one-time bonus for now, honestly, 'cause I think those will reflect the fact that we're generating more cash flow, but then the big scale investment opportunity isn't really that, you know, that popular yet. I'll take it as a one-time event for now. You know? We do want to monitor the market situation and see how the other competitors are behaving. That's something we're still trying to appreciate. Got it. Are you hinting to us that you guys have an acquisition target in mind this year? I mean, we have something on our mind. Got it. Okay. I think that is it in terms of questions on the line. Do you guys have anything else you guys wanna add before maybe we close this call? No, I think we pretty much covered all the major topics. Another stable quarter. I think our outlook for the second quarter is reasonably optimistic. But then again, we also acknowledge the fact that the full-blown recovery on the demand side isn't really happening yet. We'll continue to be optimistic and helpful. With that, thank you all for taking your time in our investor call. Okay, great. Well, always a pleasure talking with you guys, and thank you, David, Eddie and Claudio, for your time and sharing your thoughts with us. Thank you. We will see you guys next time. Thank you. Thank you. Thank you, everyone.