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

Hello, everyone. So welcome to our Q1 investor conference again. Before our IR Rodney is going to report financial numbers to you, I would like to update some news. Yesterday, we just had our Board meeting. And because a few numbers of our independent directors are going to retire this year, so we are proposing 3 new independent directors. So for the new candidates for our independent directors, we feel very fortunate and lucky to have [ Mr. Richard Xi ], who has a very long history in the telecom industry. And also, he is a very experienced and senior management in the telecom industry and company. And also, we are -- we feel lucky to have [ Mr. Jack Huang ], who is a very senior lawyer and also the partner of the law firm. And he has very -- he has many experiences in M&A, and we believe that with his joining that he can -- that we can benefit from his experience, especially in the M&A side. And finally, we also have a new female candidate for our independent director, who is [ Ms. Rose Cho ] and she is -- sorry, she is [ Mr. Rose Cho ], and she has very -- she is very experienced expert in the Internet industry. And then she's also the first on the history that we are having a new female independent director. So we are -- we feel very happy to have these new 3 directors. Hopefully, we can have the support from our shareholders in the shareholder meeting. So in terms of the financial numbers of Q1, thanks to the overall healthy demand, Q1 revenue was slightly above seasonal, up 30% year-on-year and only down 8% quarter-on-quarter. Q1 revenue was TWD 72.5 billion. With a little higher overhead costs for Q1, gross profit was down 12% quarter-on-quarter, but up 47% year-on-year. GP margin in Q1 slightly contracted to 29.8% from 31.1% in Q4, but substantially increased from 26.5% a year ago. R&D expense increased by 17% compared to a year ago because of the higher investments into the growing areas such as our EV and IA businesses, but with a more favorable still to R&D expense as a percentage of sales dropped to 8.9% in Q1 from 9.9% a year ago and only slightly increased 0.2 percentage point from 8.7% in Q4. Likewise, the SG&A expense as a percentage of sales also slightly increased to 10.5% in Q1 from 10.0% in Q4 because of the seasonality. But it dropped from 13.0% a year ago, thanks to the battery spill. As a result, operation expense down to 19.5% in Q1 versus 22.9% in the Q1 of 2020, and only increased moderately versus 18.7% in the fourth quarter of last year. With better GP margin and lower OpEx ratio, operating profit in Q1 improved 279% versus a year ago, while seasonally declined 23% versus the fourth quarter of last year. The OP margin in Q1 was 10.3% versus 3.6% in Q1 of last year and 12.4% in Q4 of last year. In terms of the performance by segment, year-on-year, we found the fastest growth in Power Electronics and followed by Automation, which mainly came from the robust demand in China market, while Infrastructure had the least growth due to the disadvantage business environment hurt by COVID-19. Sequentially, we saw a little further acceleration of the IA business as well as our EV solution business, but from seasonal decline for all other businesses. Earnings-wise, we had pretty strong year-on-year profit expansions for Power Electronic and Automation, while we also won year-on-year profit improvement in Infrastructure from low base. Please note that we changed the way we present the [ steady ] income since Q3 of last year. In the past, earnings of each segment on this page only stand for P&L of each business unit. But since Q3, all the distributed expenses such as the corporate expenses have been elevated into each segment. Non-operating profit was around TWD 1.3 billion in Q1, which was slightly better than usual. In Q1, we had TWD 8.8 billion profit before tax, up 211% year-on-year and down 11% quarter-on-quarter. EBITDA in Q1 was TWD 13.1 billion. Q1 tax expense was about $1.77 billion, representing a stable 20% effective tax rate. The net profit after tax in Q1 was TWD 6.58 billion, up 218% year-on-year and down 11% quarter-on-quarter. So the EPS in Q1 was TWD 2.53.

Okay. So the first question is -- was, I mean, what is the approximate impact of the materials and components price interest on the company's GP margin in Q1? Can this be passed on to the customers? Will this get worse in Q2?

I think, in general, that the impact is limited because we always have a very long-term business and contracts with our customers. So we have already prepared for the orders, I mean, in terms of the materials and components. But of course, for some of the urgent orders that we still need to prepare a strong components and materials for them. For those products, I mean, the cost might be a little bit higher, but I think that should be okay. The impact is limited at present.

So you shared the outlook for each product line in second quarter and the second half. I think if there are no surprises in the second quarter, all departments will see seasonal growth.

The growth rate from season to season seems to be fairly even, mainly benefiting from the more working days in Q2. We shall continue to see the best year-on-year growth of our EV business, and there should be some growth for other businesses. And also, I mean, besides our EV Solutions business, big business, we also see some further acceleration, I mean, in our Industrial Automation business as well as a little more acceleration in our telecom power business as well.

Okay. So how much does the copper price account for the -- I mean, accounts for the cost of goods sold? Can the rise in copper prices be completely passed on? Is there any way to have...

We don't use raw material copper very much. We only use copper wires while the price of copper wires does not fluctuate as much as copper raw materials. Currently, this part has a material impact on our financials.

Okay. So can expenses, I mean, still be -- effectively can show this year? What is the target of OpEx and sales ratio -- OpEx over sales ratio?

If we can see the growth acceleration for this year, the operating expense ratio should be -- we should have a chance to shrink a little bit or maintain at the current level. But as mentioned before, we still -- we will still actively make the investments that should be made, especially in R&D of the new products and new technologies.

Is there still room for improvement in DET's GP margin and OP margin?

It depends on the -- their scale and the product mix. But because Delta Thailand is still a listed company, we will now speak for them here.

So the next question is, can you talk about the demand status and outlook for laptops and servers? Is the shipment affected by the shortage of components and the visibility for the orders?

The demand for laptops and servers still seems to be quite strong in this short run, although the shortage of parts and components is heard, I mean, from time to time. But this is mainly in downstream assemblers, which is an indirect impact for us, and should be a short-term phenomenon. However, the visibility of this business is low, and it is difficult for us to make any forecast.

Does the outbreak of COVID in India affect the company's investment plan in India? How much capacity do we currently have in India? How much the operation of the battery affected by this?

Yes, I think the current, I mean, situation in India is indeed worrying and it's quite numerous. So we also have, I mean, some confirmed cases, I mean, in the local companies. The only thing we can do is we will try to do our best to help and fight the pandemic through the Delta Thailand. However, at this stage, India accounts for a very low part of our overall operations. So the impact is still limited.

Do you have any target for industrial automation this year? eNovance is quite optimistic about their growth. Is this also the case where you have the competition from Chinese companies intensified?

I mean the Industrial Automation market is still -- I mean, it's very large. And we have, I mean, this internal goal of double-digit growth every year. The Chinese market was already very strong last year and the base -- I mean the base was radically high, but we still maintain a good growth, I mean, a pretty nice growth, I mean, so far. And in terms of the competition, I think the competition is everywhere, so the competitors are not only in China, but also from other areas. I think the only -- or from other regions. The only thing we can do is we just -- we need to equip ourselves with better technologies and better services to our customers.

Can you tell us more about benefits to our own battery automation? I mean, how much the factory automation has brought to the company's GP margin in the past few years?

I think we continue to strengthen our internal small manufacturing and has seen some cost effectiveness in the past 2 or 3 years. How much -- I mean, sorry. However, how much it can be depends on the status of each unit and the changes in the production line.

The telecom power has been relatively -- I mean, the market has been relatively sluggish in the past few years. Is this year more optimistic? Does 5G deployment in various countries see any acceleration?

We have seen some acceleration In telecom power since the fourth quarter of last year, mainly because of the improvement in order -- I mean, situation in the United States as well as the deployment of 5G.

Well, currently, the market is worrying about the construction -- I mean, slowdown of data center.

What do you think about this?

I think, of course, in the short term, the demand for infrastructure or the construction, I mean, plan for infrastructure or IT equipments will, of course, change, I mean, or fluctuate and see ups and downs in the short run. But in the long run, driven by, I mean, the growth of artificial intelligence applications, I believe there is still a lot of room for growth.

The EV business continued to grow in the first quarter. Does it help the loss, I mean, situation? What percentage of revenue is expected, I mean, to account for this year and next year?

Our EV solution business or our EV business accounted for about 5% of total sales in the first quarter. And it seems that it will continue to rise in the short term, but the precise ratio still depends on the status of other businesses. The loss -- however, the loss, I mean, situation has not changed much from last year because, I mean, the main reason is that despite substantial growth in revenues, but our investment has also accelerated. Then hopefully that we are able to see the breakeven going, I mean, we think, in 1 to 2 years.

Do you have any exposure to the China EV market?

Yes. Of course, we do have an exposure in the China EV market, but we mainly work with the western OEM, which are the auto -- the carmakers. We have the joint venture with those western automakers in the China market, but we don't really work directly with the Chinese carmakers.

Any exposure to the e-bus, e-motorcycle, e-bike or electric industrial vehicles?

Yes, of course we have been working on these kinds of electric vehicles, not only on the commercial cars, but also on other kinds of the vehicles. So we have our -- we already have like 1% to 2% revenue from these other applications.

Most of your capacity expansion plan were passive, how much CapEx do you need?

Given the strong demand, I mean, for passive components and robust demand, I mean, in the market, we continue to expand our capacity. And especially that we will have more new capacity in our Wujiang plant and new Taoyuan plant. In terms of the CapEx that -- for last year and this year that we have -- I mean, we're meeting -- I mean, the Board of Cyntec has approved at about TWD 1.6 billion and TWD 1.2 billion. And those plans are in the future.

So how do you see the outlook for the second quarter and, of course, for the second half of this year?

So currently, we still expect normal seasonality. Normally, that we will have like maybe double-digit sequential growth, I mean, in the second quarter, and then we might have maybe high single-digit growth in third quarter. And it's still too early to say, I mean, for the fourth quarter.

So more people are taking the vaccines in Taiwan, and people are, I mean, allowed and able to travel again. Will we see a surge in your, I mean, expenses again?

I think it's still very far away from -- I mean, even people are taking the vaccines. It's still quite far away from that. And people are allowed to, I mean, travel around. So even that, I mean, people are allowed to travel around, I don't think that we will have many traveling activities all of a sudden.

Apple has announced their strong results just last night. But they, I mean, remained -- I mean, in terms of the shipment in Q2, they remain rapidly conservative because of the strategic components. Do you see any impact on this? And what is the reason for the strong and fast growth for Cyntec given the slow demand for smartphones?

I think, currently, in terms of -- for the second quarter, we remain consciously optimistic. We actually have very little control of the supply chain. But in terms of the customer -- I mean, in terms of the customers' mix, we will try to fulfill. I think there are 2 main reasons for the fast growth for our passive components. One is the higher penetration rate in 5G smartphones. Another one is we started to see some contribution from the auto applications.

Can you talk about your expectation, I mean, for your EV solution business as well as your EV charger business?

For the first quarter of this year, our EV Solution business, actually slight -- I mean, growth has -- our EV Solution business grew slightly more than 100%. And for our external EV chargers that we had 15% growth. Considering the base -- the comparison base, I think we're in the second half. We might see literally, I mean, a slowdown of the growth -- in terms of the growth rate in the on-board business. But for the external chargers, I think it will accelerate.

Okay. So can you please talk about the current situation, I mean, of Delta Thailand? And will the situation in India affect Delta Thailand's operations?

I think I have answered similar questions before. Because Delta Thailand is still a public listed company, so we are not able to speak for them.

Do you worry about the double bookings from customer? How do you do with this risk?

I think, at present, we have not observed a serious problem of double bookings. And the inventory at the sales and in transit is still lower than the normal level. And because, I mean, the production cycle of our products is quite short, usually only a few days, double booking will not be risk -- a big risk for us. However, if there are serious problems, I mean, in the supply chain resulting in some substantial fluctuations in subsequent orders, it will be reflected in the stability of our businesses. But this is very difficult for us to control.

So how much opportunity do -- or how many -- how much opportunity do you think that the new U.S. government's infrastructure plan can bring to you? And will be on which areas?

I think the new, I mean, big infrastructure plan, I mean, of the U.S. government will mainly -- I mean we will mainly see more of some opportunities in our infrastructure business. For example, our telecom power renewable powers and our energy storage system as well as our EV infrastructure.

After -- we have seen, I mean, the slow improvement in your network business for a while.

Well, we see an improvement for this year. I think that we have, I mean, talked about this before. We actually have carried out some reorganization, I mean, for our networking business. And hopefully, we can see the results as soon as possible.

So how does the sharp interest in logistics affect your cost?

The interesting logistics did cause some additional burden on us in the first quarter, mainly in the transportation offers or semifinished products between, I mean, different batteries, but the proportion is not big. Shipping costs for external shipments are usually absorbed directly by our customers, so which has very little impact on us.

So we got another question from [ Aman ], the investor. Do you have any plans to increase your inventory levels?

I don't think that we have other plans because, currently, we have the materials or components. We will try our best to, I mean, complete the production or manufacturing of the products and shift to the customers.

Do you see, I mean, that Delta, as a company, that you are able to see more opportunities, I mean, from the new U.S. government?

I think for the new U.S. government, they has reemphasized the importance of -- and the seriousness of climate change. I do think that is a very good thing because, in Delta, we have been always very concerning about the risks of climate change. So we are really happy to see that this issue is coming back to the table. And as a company, we always believe that it's actually easier to save the electricity than to generate electricity. It's very complicated to generate more electricity, but it's actually much easier to save the energy. So that's also what we -- I mean, we have been providing value to our customers. There are many different business lines. For example, we have this smart building business. And then we also -- we are able to help our customers. We can help our customers to be more energy-saving in their buildings. And I think that is our pitch for many of our businesses.

Do you have any visibility for your EV business? And any customer -- I mean, the names of the customers you can mention for this business?

I think, as I just said, I think many governments and many countries, they are working on their infrastructure for EV. So we will continue to see -- we shall continue to see the higher, I mean, penetration rate of EV cars. But in terms of the names of customers, we are not able to reveal.

Okay. So can you share more about like for your Building Automation business?

I think that we actually have different solutions for the building automation market, but we do have a pitch to improve or increase the power efficiency for the buildings because we try to have -- we want to help our customers to increase their power efficiency and reduce the -- I mean, the energy consumption with our technologies and solutions. And within the building, normally, the air conditioning consumes the bills, I mean, the largest amount of energy. So where we have some solutions, I mean, to tackle with such a problem.

So can you give us some update on your M&A progress? Given that, I mean, the strong performance in your store markets worldwide, would you worry about the valuation of your potential targets?

I think we have always -- we have been always, I mean, keeping an eye on the financial M&A target. Of course, we wouldn't like to overpay for the companies or the acquisitions because we are not a financial investor. So we spent -- I think the -- I mean, we can see a very evident, I mean, symmetry with a company that we might still like to have them with us.

Okay. For this question, I will have our -- I would like to have our CIO to answer and give us more colors on this. And I think that since Q3 of last year, actually, the whole M&A market, I mean, has been growing very, very fast. And according to the third-party estimate for this year, that you might have 6% overall growth for M&A market. And for next year, you might have like about 4% growth for next year. But I think that is for the overall market, but we only focus on specific company on industry.

Well, of course, I mean, even the valuation, I mean the whole market, I mean, is getting higher, of course, we still need to adjust our methodologies, I mean, or our strategies in terms of the M&A. And I think the good thing -- I mean, good news for us is we actually -- as we just mentioned at the beginning that we have a new independent director, I mean, the candidate, which is [ Mr. Jack Huang ], who is very senior lawyer in the M&A area. Hopefully, that we -- with his help, that we can have more progress and improvements in the M&A side.

And okay, I think that -- those are all the questions. So thank you for joining our virtual conference again. So thank you. We will see you next time. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]