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

So thank you for coming to our virtual investor conference. So now we will review the financial numbers of Q2. Q2 revenue was TWD 78.8 billion, up 9% Q-o-Q and up 11% year-on-year. Gross profit was up 10% Q-o-Q and up 2% Y-o-Y. GP margin in Q2 increased to 30.1% from 29.8% in Q1, but slightly contracted from 32.9% in 2Q of 2020 due to a high base last year that had a one-off subsidy from the government and higher material costs and a little dilution from the rapidly growing EV business. In Q2, the R&D expense was up 7% year-on-year and 8% quarter-on-quarter, with a more favorable scale to R&D expense as the percentage of sales dropped to 8.8% in Q2 versus 9.2% in Q2 of 2020 and 9.8% (sic) [ 8.9% ] in Q1. Likewise, the SG&A expense was up 6% year-on-year and 4% quarter-on-quarter. The SG&A expense as a percentage of sales contracted to 10.1% in Q2 versus 10.6% in the second quarter of 2020 and 10.5% in Q1. As a result, the OpEx ratio shrank to 18.9% in Q2 versus 19.8% in the second quarter of 2020 and 19% -- and 19.5% in Q1. The OP in Q2 was up 17% Q-o-Q, but down 5% year-on-year. So the OP margin in Q2 was 11.1% versus 10.3% in Q1 and 13.1% in the second quarter of 2020. So sequentially, we saw seasonal growth for all segments. Year-on-year, we [ found ] strong growth for both Power Electronics and Automation, while Infrastructure had a little bit negative growth due to the disadvantaged business environment hurt by the pandemic. Earnings-wise, we found seasonal profit expansion for all segments and pretty strong year-on-year profit improvement with Automation, with some profit contraction for Power Electronics and Infrastructure compared to a year ago. In terms of the sales breakdown, Power Electronics accounts for 59% in Q2 versus 90% (sic) [ 60%] in Q1 and 57% from a year ago. Automation was 16% in Q2 versus 15% in Q1 and a year ago. Infrastructure was 25% in Q2 versus 25% in Q1 and 28% in the second quarter of 2020. It didn't change much from Q1 to Q2. The nonoperating profit was around TWD 1.3 billion in Q2, which was similar to Q1. In Q2, we had TWD 10.1 billion profit before tax, up 14% Q-o-Q but down 1% year-on-year. EBITDA in Q2 was TWD 14.4 billion, which was up 10% Q-o-Q and up 1% Y-o-Y. Q2 tax expense was about [ TWD 2 billion ], representing a stable 20% effective tax rate. The net profit after tax in Q2 was TWD 7.6 billion, up 15% Q-o-Q and flattish Y-o-Y. So the EPS in Q2 was TWD 2.92. Now we'll have a look at the accumulated numbers of the first half. So the first half revenue was TWD 151.3 billion, up 20% from a year ago. GP in the first half was up 19% year-on-year, with a [indiscernible] margin of 29.9%. The R&D expense in the first half was up 12% year-on-year with a favorable scale. The R&D expense as a percentage of sales dropped to 8.9% versus 9.5% in the first half of 2020. The SG&A expense in the first half was up 6% year-on-year. The SG&A expense as a percentage of sales contracted to 10.3% versus 11.6% from a year ago. So the OpEx ratio also [ shrink ] to 19.2% from 21.2% in the first half of 2020. The OP in the first half was up 45% year-on-year, and the OP margin in the first half significantly increased to 10.8% from 8.9% a year ago. Year-on-year, we saw pretty strong growth in building -- Power Electronics and Automation followed by a little recovery in Infrastructure. Profit-wise, we found the most significant expansion in Automation and pretty strong improvement for Power Electronics and Infrastructure as well. So the sales percentage of Power Electronics, Automation and Infrastructure in the first half was 60%, 15% and 25%, respectively, compared to 56%, 15% and 29% from a year ago. The expansion of Power Electronics was largely driven by the rapid growth of EV solution business. In first half, we had about TWD 2.6 billion nonoperating profit. The increase in orders was mainly because of the gains in -- the gains of some of our minority investments. In total, we had TWD 18.9 billion pretax income, up 45% from a year ago. Our EBITDA in first half was TWD 27.4 billion, which was up 30% from a year ago. The first half tax expense was around TWD 3.8 billion, representing a 20% effective rate. The net profit after tax in the first half of 2021 was TWD 14.2 billion compared to TWD 9.7 billion a year ago. So the EPS in the first half was TWD 5.46 from TWD 3.72 a year ago.

So here, we have the first questions. It's about what is the approximate impact of the price interest in raw materials and components on the company's GP margin in Q2? Can you pass on the cost increases to your customers? Which materials you'll see the greatest cost pressure? And which departments are most affected?

So there -- I mean, there is indeed a pretty severe price increase for many different kinds of components and materials from 3% to 10%. I mean for different price of components or materials, so of course, we need to negotiate and discuss with the customers and to share the cost pressure with the customers as well. But the price increase, I mean, in terms of the range varies from product to product.

So the second question is, can you share the outlook for each product line? What are the main drivers? What's the trend for GP margin?

I think currently, we are expecting the normal seasonality, which means that -- I mean, the second quarter, usually better than the first quarter. And the third quarter, better -- and the third quarter usually is the peak season of the whole year. And the fourth quarter normally is about like flattish or sometimes it's slightly better or slightly lower than the third quarter. So -- but for the fourth quarter, it's still a bit early to have a clear visibility. But in terms of the third quarter, I think it's very likely and probably is going to be better than the Q -- than the second quarter. Though, there are still some bottlenecks in the supply chain, but I believe that we have already -- I mean, the toughest time was already behind. And in terms of the price increase, I mean, for our selling price, because it's difficult or it's impossible to negotiate prices with your customers at the beginning of the inflation because we want to maintain a good relationship with the customers. So -- but I think after August or September, we will be able to start to renegotiate the prices, I mean, the selling price with our customers and try to pass on or share some of the cost pressures with our customers. So hopefully, I mean, things will be getting better after August or September. And in terms of the main drivers for second half, I think still EV businesses and IA and Data Center Solutions, and our telecom power business will be the faster-growing areas. Our EV solution business, we still -- we expect it to grow by at least 40% to 50% in the second half. And lastly is our telecom power business. Until, I mean, the deployment or the rollout of 5G is not as fast as everybody imagined. But is indeed -- we are seeing some accelerations about the rollout of 5G. So in the second half, I think things will -- I mean, those will be the areas growing faster within our portfolio.

So the third question is does the OpEx increase significantly due to the pandemic outbreak in Taiwan?

I don't -- I think that our OpEx, I mean, in terms of the numbers is relatively stable because the situation is still the same. There are no traveling expenses. So I think that, generally speaking, our OpEx remains pretty stable now.

And can you talk about the demand and outlook for [ demand for notebooks ] and server powers? Are you seeing any slowdown in Q3?

So we just have -- I mean, I just had some discussions with our business managers for the notebooks and server powers, I think there were -- I mean, there are many -- some noises about like whether the demand for notebooks and servers are going to slow down when the -- I mean when the things, I mean, getting more stable now. But the situation now is we haven't really seen that happen at this moment, but probably because we haven't really satisfied all the demand from the customers. So currently, we haven't seen that.

And do you think that Q3 will be the peak of this year? If there are some orders being pushed out to the fourth quarter because of the material supply, does that mean Q4 will be better than Q3 this year?

We actually have very limited visibility for most business. Normally, Q3 is the peak season, but we still need to wait and see.

So are you seeing any slowdown in China market?

Currently, it still looks pretty good. I think I have explained it for many times that the transformation in the factories, it's a long-term trend in the factories.

So how do you see the component shortage problem? Will [ you ] be [ short ] by the end of this year?

As I just said earlier, I think that most -- I mean the toughest moment was already behind.

Are you seeing intensified competition in server power supplies? And is there a chance to accelerate the growth of server powers in 2022 because of the new platforms of Intel and AMD?

I think we have been the market leader in the server power for many years, and we still continue to improve our technologies and competitive advantages. I can probably say that I'm pretty confident about our -- the technology and performance of our server powers. We are definitely, I mean, one of the best, I mean, in the market, if we are not the best. So I'm pretty confident about our performance. So I believe we can maintain our competitiveness in the future. And in terms of the server market, I think it's fairly stable. There are a few large fluctuations. The launch of the new platform should have limited impact on the market demand. But as an important partner of CPU manufacturers, we will definitely launch corresponding power and cooling products to help our customers smoothly enter to the next generation.

So how do you see your [ game console ] power business in the second half?

Usually, the second half is the peak for game console business. However, I mean, since last year, the supply has been abated by the shortage of materials, so we are not certain about this now. But anyway, I mean, the gap is not on our side but on other components.

So who are the main competitors for auto passive components?

There are quite a lot of manufacturers focusing on this market. Such as Panasonic, Murata, TDK. As a latecomer, I mean, [indiscernible] with the strong R&D capabilities, product performance and strong cost structure, I believe that we will show our competitiveness very soon. And the auto market by nature is quite different from consumer market. But after many years of the hard work and extra hard work, I think we have seen rapid growth and significant revenue contributions from the auto products.

Any -- I mean, so how about the loss-making situation in your EV solution business? Any improvement in the bottom line? How fast do you think this business can grow this year and the next year?

So being affected by the component shortage, the EV solution had a moderate sequential growth in Q2 compared to Q1, because we are still investing pretty aggressively. So hopefully, we are able to achieve breakeven, I mean, within 2 years. But I'm pretty confident about this business because the market itself is growing really rapidly. So we just need better scale in order to see the improvement of the bottom line.

So how much of the Delta's revenue come from Tesla?

We don't comment on, I mean, the information of any individual customers. But Tesla is not the only company making EV. Many of the major automakers are being more aggressive on the EV market and deployments. So -- and the entire market is growing rapidly. So we are relatively optimistic about the business.

Any early thoughts about the macro environment for next year?

I always said that I'm not an economist because there are so many variables and swing factors and uncertainties in the environment. So I think that my answer is always the same. I mean we can -- we have no control about the macro. The only thing we can do is we do our best and we can only be ready for the orders and for the business.

So compare it to the macro environment. I mean any comment on the macro environment?

I think that it's hard for me to make any forecast. But even in the difficult time, I think there are still some companies, they are able to outperform other peers because of their better operations and better management. And that's our goal.

Can you talk about the outlook for Q3?

I think in the short run, the main issues remain the component and material supply in the whole supply chain. But as our Chairman just said, the toughest time was already behind and also because we are the biggest or we are one of the biggest, if we are not the biggest, customers of our suppliers. So I think we -- it's likely that we can be better. I mean we have better control of the whole situation.

So do you have any, I mean, idea about your penetration rate of your EV solution business according to your project wins ahead?

I think there are -- because, I mean, there are many new models being launched in every month and every quarter, so the numbers quite fluctuate. But I believe that we have pretty good market share in this market, given we have many project wins from the major automakers.

So [ then ] give us more detail about the impact on margins, I mean, in terms of -- from the rising cost in -- I mean, for each [ product line ]?

I think it varies from product to product. For the products with higher margins, I think that is relatively okay. But for -- I mean, the business with -- for businesses with a lower -- relatively lower GP margin, I mean, it is being more greatly affected. But in general, I think that we are okay.

So can you talk about your expectation for your EV solution business?

As I said, the major automakers, including the European automakers, the U.S. automakers and even the Japanese automakers are the customers of Delta. So I think we are relatively optimistic about this business.

So even with the pandemic, Delta Thailand's business still seems quite strong. Is that because Delta moved more business to Thailand? What are the main businesses?

Because Delta Thailand, I mean, is a public-listed company in Thailand, I think that we are not -- I mean, it's not appropriate for us to answer the questions for them. So we are not supposed to speak for them.

So any recovery in your networking business?

At present, demand from corporates in Europe and the United States has not recovered significantly. But when there are more employees returning to the office, corporate IT investments should also grow correspondingly when -- I mean, which should drive market demand.

So as you mentioned earlier that the EV business accounts for like 5% of your total revenues, is that only the onboard EV products? Or it's the aggregate number of all EV-related businesses?

Yes, I think that we actually have many different products exposed to the auto market, for example, in our cooling fans, I mean, we also make some cooling fans for auto. So -- and then we also have some passive components for the auto market as well. So when we talk about the EV solution business, I mean, which accounts for like about 5% of the total sales now, which refers to the onboard EV products.

Is there any acceleration in the 5G rollout? Are you seeing any acceleration in your telecom power business? Do you think that you are able to benefit from the COVID situation in the U.S. and EU?

I think the problem of 5G is still the same. I mean the lack of the material or the killer applications. So whenever, I mean, I went to the phone stores, I always ask them, so what are those -- I mean what are these 5G phones for? And they always answer me, okay, I mean in terms of the speed, it's a bit faster, but also, it's much pricier. So I think that is the main reasons why people are not seeing, I mean, the rapid growth of the whole 5G market currently because for the operators, they still need to figure out how they can make their return from the 5G investments.

So can you talk about your EV charger business?

I think in order to see the population of the EV cars, I mean, on the road, the infrastructure, which are the EV chargers are very, very critical. So that's why you also see that, I mean -- the U.S. government, they just approved the spending on the infrastructure, which includes the EV chargers.

R&D and any ongoing M&A projects?

M&A is part of Delta's long-term strategy. We have a professional team that continues to look for any possible opportunities. Since, I mean, the market is very hard at present, it's difficult to predict whether we can successfully to close the deals eventually.

Do you think that it's possible that we can, I mean, maintain the GP margin about 30% in the second half?

Yes, I think -- yes, I think so. Because as I said, I mean, the worst time was already behind. So I think it's quite likely.

So are you seeing any impact on your Automation business from the Delta variant?

Actually, we have 2 parts within the Automation segment. One is the Industrial Automation, the other one is the Building Automation. So for the Industrial Automation, I think the impact was -- is pretty limited. But for Building Automation, for there -- I mean, they had -- I mean they had some negative impact on the Building Automation because the Building Automation business by nature is a -- I mean, a business you need to send people to the source and to the sites to help the customers to install the device and equipment. So during the pandemic, it's very difficult to do so. So that's why it's been affected by the pandemic.

So what is the reason for the resignation of the current CFO? Can you tell us more about the new CFO?

So after being with us for 35 years, our CFO, Ms. Wang, decided to retire at the end of this year due to her personal plan. Sure, we are really, really grateful for her long year contributions to Delta. And the new CFO, [indiscernible], he has also been with us for many years and he is the CFO of Delta Thailand as well. With his -- I mean, he has extensive knowledge and complete experience in accounting, financial planning and process improvements. So we hope that he can lead the global finance team to overcome the challenges and create new breakthroughs for Delta.

So are you expecting any price increase for the negotiation of the selling price with your customer in the third quarter?

I think it's case by case because for each customers, you have different relationship with different customers. And the negotiation power, I mean, the bargaining power of each customer is different too. So it's not just like, okay, so we saw some cost interest and then we just pass on to the customer immediately. It's not that easy. I think a very critical element of Delta is we don't take advantage from this. I mean by the -- I mean, we wouldn't tell our customers if you don't, I mean, raise your prices, then we don't ship the products. So we always want to help our customers on their business. So I think that's all the questions today. So yes, and I think that everybody stay healthy and stay safe and stay happy. So hopefully that we can see each other in person in the next time -- I mean, in the next time earnings call, but we will see. So thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]