Delta Electronics, Inc. (2308) Earnings Call Transcript & Summary

Hello, everyone. So before we start, I would like to wish everyone have a very good happy new year. So now we are going to start the conference -- the result conference today. So before we start reporting the financial results of Q4, I would like to share with you then some accomplishment that we have done for the ESG. So as you may know that we actually established a new role, which is the Chief Sustainability Officer in the last year. So we will have our CSO to report some efforts we have for the ESG before we present the financial results.

So I would like to share a news that Delta has confirmed joining RE100, and we have set up a target to source 100% renewable energy by 2030, which is actually a quite aggressive target. Meanwhile, I would also like to share some good news with you. As we have been long concerned -- we have long been concerned about the climate change and actively participate in the international initiatives, so Delta has been included by DJSI World Index for 10 executive years, and we have also been ranked as the industry leader for 5 years. So in 2020, we are scored as the A-List company in both the climate change and water security categories of global -- of the Global Climate Change Report 2020 released by CDP. In addition, Delta is also recognized as the Supplier Engagement Leader by CDP in 2020. So speaking of the ESG, I would also like to share my personal feelings about this topic. So actually, as you may know that new in Texas in the U.S., I actually went to the postgraduate -- I actually went to -- done my degree in Texas. So I remember -- I was remember the weather there was really, really hot. So it was actually really surprising to me to see the recent news in Texas. So to me that -- I think the climate change is just not that far away to us anymore. So we really need to do something about it. So in response to the climate change, we have also established a system and internal price for our carbon price, which means that for each product we produce that how much energy consumed that we will turn and translate that into the carbon price. So as you can see that how many is in Texas right now. I think there is actually more to come. So I think the environmental protection is not only the responsibility for someone -- for everyone, for every individual [indiscernible]. So it's actually really hard to believe for the to see the pictures of Texas right now. So that's also one of the reasons why we are doing this RE100 project within Delta. Okay. So right now, we are going to report Q4 financial numbers. As usual, those numbers, I mean, the consolidated numbers have been audited by the CPA. So the Q4 revenues hit an all-time high, up 15% year-on-year and 1% quarter-on-quarter. So the Q4 revenue was actually a little bit better than our expectation because the normal usually the Q4 might be slightly lower compared to the Q3. So in terms of the GP, the gross profit in Q4, which was up 22% year-on-year, but down 2% quarter-on-quarter. The Q4 GP margin slightly contracted to 31.1% from 31.9% in Q3, but increased from 29.3% a year ago. Q4 expenses also remained stable compared to Q3 and a year ago, with only 2% sequential increase in both R&D and SG&A. Therefore, the R&D stands as a percentage of sales increased by only 0.1 percentage point to 8.7% from 8.6% in Q3, but significantly decreased from 9.8% a year ago. Likewise, the SG&A expense as a percentage of sales also slightly increased by 0.1 percentage point to 10% from 9.9% in Q3, but decrease from 11.6% a year ago. As a result, the OpEx ratio moderately increased by 0.2 percentage point to 18.7% in Q4 from 18.5% in Q3, but significantly declined from 21.4% a year ago. With the seasonal increase in OpEx and inferior gross profits, OP in Q4 was down 7% Q-o-Q, up 81% year-on-year. Q4 OP margin also slightly decreased to 12.4% from 13.4% in Q3, but significantly improved from 7.9% a year ago. So in terms of the performance by segment, sequentially, we saw a little pickup in IA and most divisions with the Infrastructure, but for relatively softer demand for Power Electronics from high base in Q3. Year-on-year, Power Electronics still remains the fastest-growing segment versus benign recovery in Automation and Infrastructure. And earning-wise, we had a pretty strong year-on-year profit improvements from all segments, the modest sequential contraction in Power Electronics and Infrastructure. So the percentage of Power Electronics in Q4 was up to 56% in Q4 from 51% a year ago, but down from 58% in Q3. Automation in Q4 was up 1 percentage point from the previous quarter to 13%, but down 1 percentage point from a year ago. Infrastructure was also up 1 percentage point from the previous quarter to 31%, but down 3 percentage points from a year ago. The nonoperating profit was around TWD 150 million in Q4. The significant decline in orders was due to a write-down of investment in LOYTEC, roughly TWD 800 million. The pandemic of COVID-19 has significantly slowed LOYTEC business and its ability to generate cash. So to be conservative, we had this write-down. In Q4, we had TWD 9.9 billion profit before tax, up 58% year-on-year, but down 13% quarter-on-quarter. EBITA in Q4 was TWD 14.0 billion, which was up 37% year-on-year, but down 10% quarter-on-quarter. Q4 capital expense was close to TWD 2 billion, representing a 20% effective tax rate. The net profit after tax in Q4 was TWD 7.4 billion, up 46% year-on-year, but down 11% quarter-on-quarter. So the EPS in Q4 was TWD 2.86. So now we have a look at the full year numbers of 2020. The 2020 revenue was TWD 282.6 billion, up 5% from a year ago. GP margin in 2020 increased to 30.9% from 27.8% a year ago with 17% increase in gross profit. With the lower SG&A expenses during COVID-19 and a stable investment in R&D SG&A expense as a percentage of sales was down to 10.7% from 11.6% a year ago. While the R&D expense as a percentage of sales was slightly up to [indiscernible] from 8.9% a year ago. That's due to scale and moderate expansion of the OpEx. The OpEx ratio in 2020 was down to 19.7% from 20.5% a year ago. So the OE margin in 2020 has significantly improved from 11.1% from 7.2% a year ago. Year-on-year, significant profit in all segments with the revenue growth from Power Electronics and moderate interest in automation, but a little contraction in infrastructure. Therefore, the sales percentage of Power Electronics increased to 55% in 2020 from 50% a year ago. Infrastructure contracted to 31% from 36% a year ago, while automation remained the same at 14%. In 2020, we had about TWD 2.8 billion in operating profit, a significant decline in the gain on disposal of investment, again, was related to the one-off disposal gain of DET in 2019. So in total, we had TWD 34.3 billion per tax income. EBITA in 2020 was TWD 50.5 billion, which was up 15% from a year ago. Tax expense in 2020 was around TWD 7 billion, representing a 20.1% The net profit after tax was TWD 25 billion, up from TWD 23 billion a year ago. The EPS in 2020 was TWD 9.81, excluding the one-off disposal gains of DET, which represents a 36% increase compared to a year ago. So the proposed cash dividend per share this year was TWD 5.5. Okay. So now we can start a Q&A session.

So if you have any questions, you may just raise your questions online. So the first question is, what is the impact of the supply shortage and price inflation of raw materials and components on the company's costs? How does the company respond to the current situation?

So I actually I have asked the -- each business groups, the head of its each business group. And so far, I think we are okay with this potential supply shortage and price inflation. I think in general that we are -- I mean, Delta, we are in a roughly better position because we actually are the -- I mean, we are the bigger customer to most of the suppliers. I think that is also one of our competitive advantages. I think here I got a good example for your reference. Just as in last year 2020, there were actually many rush orders for the IT equipment. But compared to many of our peers, the supply -- our supply -- the component supply were actually relatively stable compared to many of other competitors.

Okay. So the next question is which materials and parts you see obvious shortage or pricing inflation? When do you see is that it should release?

So as I said, currently, we are okay with this because I don't -- I haven't seen really significant impact at this moment. But of course, we got to be prepared -- we got to prepare for that. So I think we are managing okay here.

So can the increase in material costs be passed through to the customers?

So -- of course, there might be some relations between the -- I mean, the material price and selling price to the customers. But that is not necessary because sometimes it still very much depends on the demand and supply.

Can you run the growth prospects of several major business units this year, for example, will EV business grow better, automation, data center and telecom power?

I think it depends on which way, I mean, you look at the growth rate. So in terms of the rate, I mean the percentage, I think the fastest growing would be the EV business and then followed by the component business and then followed by the data center business.

So what is the estimated growth of EV in 2021? When will there be a chance to see breakeven? So can you talk about the midterm goals, for example, the sales percentage of EV business and its gross margin?

So as I just answered, in terms of the growth rate, the EV business might be the fastest growing business unit within the group. But that is also largely related to its low base. Okay. So I think the trend, I mean, for going to this electric driven is very clear now. So both the traditional OEMs and newly established carmakers they are also moving forward to this direction. So we are also working on this. So, hopefully, that we might be -- we have -- we might be able to achieve the breakeven point in 2 years, but it still depends because we are still doing the capacity expansion for this business.

So we actually saw some weakness in your networking business in last year. So what was the reason? And what might drive the recovery of this business?

So for the networking business, we are actually doing some translation for this and some new changes for this business. So in the past, we actually bring more consumer products, but now we are trying to do some -- we're trying to make some change on this business. So after we have the new CEO and -- who has different thoughts on this business, I think that maybe going forward, we will see some differences.

How long do you think the prosperity of market demand can last?

I think given there are more and more in the market right now. So I think this kind of, I mean, prosperity for the demand is not going to last very, very long. But for the long learn, I still believe that given the data, I mean, traffic, the increase in data traffic. So I still feel very positive for the data center for the demand of -- for the data center.

So what is the estimated CapEx for 2021?

So in 2020 that we actually had about TWD 17.8 billion CapEx -- is the CapEx investment as we are actually building up many new factories and doing some expansion for the factories in different areas in China, in India and in Taiwan. So I think that our CapEx investment in 2021 might be over TWD 20 billion for 2021.

So can you give us any idea for the dividend ratio this year because it seems to be lower than the previous years? So can you give us a guidance like how does -- I mean, dividend payout ratio is going to be in the next few years?

So I say that because we still have a lot of things to do. So we need to give some cash for the -- for our investments, I mean, for the future growth.

There are any plans for the new M&A and in what areas?

Yes, of course, we have decided and determined that M&A will be the growth -- one of the growth engines, I mean, for next decade since 2015. So we actually have many projects in the pipeline. So we keep looking for the new targets. So as we actually -- we have many new businesses and new areas. So for example, in industrial automation, in order to be, I mean, a solution provider with more -- with a more comprehensive portfolio, and also because we are doing this, I mean, EV business, which requires a lot of investments. So we always keep an eye in the market to see if there are any -- if there is any chance to find the right partner.

Okay. So what are demand growth drivers in this year? Does infrastructure see a recovery in demand? Is there a goal for GP or OP margin?

Yes. I think I have answered some of the questions before. And for the GP margin target, I think that, hopefully, we can maintain the GP margin about 30%.

How have the business units perform compared to the expectations since Q1?

I think that currently, we are doing okay, and the demand is looking okay, I mean, since Q1, especially compared to the history, I think this year, the Q1 seems -- looks better in terms of its seasonality. But again, I think there are still many uncertainties and in the market. So something I always say, which is very important, it's the way that you -- how do you cope with this the changes and new challenges.

Do you think the strong demand can support a stable ASP? And can you talk about your opinion on the long-term price and GP margin of the IT equipment and power supply?