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

[Interpreted] Hello, everyone. Welcome to our Q3 2021 investor conference call. So today, we will have our new CFO join us with this call, who is Mr. Po Yu. Mr Po Yu is a very experienced financial officer in the company. Okay. So as usual that we will have our IR Officer, Rodney, to report to you the Q3 numbers. And then after that, we will have a Q&A session. So you may raise your questions through the platform, and they will be read and answered later in the Q&A session. So as usual, all the financial numbers are reported based on IFRS and consolidated numbers have been reviewed by CPA. Now, we will review the financial numbers of Q3. Q3 revenue was TWD 79.6 billion, up 3% year-on-year and 1% quarter-on-quarter. Limited by the global supply chain disruption, Q3 revenue was slightly below seasonal. Due to a combination of materials and components price increases and a high base from last year. So the gross profit was down 5% quarter-on-quarter and 9% year-on-year. [ GP ] margin in Q3 fell to 28.3% from 30.1% in Q2 and 31.9% a year ago. In Q3, the R&D expense was down 1% Q-on-Q and up 4% Y-o-Y. Likewise, the SG&A expense was down 1% Q-o-Q and up 2% year-on-year. And therefore, the OpEx in Q3 was down 1% Q-o-Q and up 3% Y-o-Y. Rationalized R&D expense as a percentage of sales slightly dropped to 8.6% in Q3 versus 8.8% in Q2 and 8.6% in a year ago. SG&A as a percentage of sales also slightly contracted to 9.9% in Q3 versus 10.1% in Q2 and 9.9% a year ago. So the Q3 OpEx shank to 18.5% versus 18.9% in Q2 and 18.5% a year ago with an unfavorable GP margin. Op margin in Q3 was 9.8% versus 11.1% in Q2 and 13.4% a year ago. So in terms of the performance by segment, limited by the global supply chain disruption, sequentially, we found mild growth for Power Electronics and Infrastructure while seeing a seasonal decline in automation. Year-on-year, we saw strong improvement for Automation and modest interest in Power Electronics while Infrastructure had a little negative growth due to the advantaged business environment hurt by the pandemic. Earning-wise, due to the components and materials cost inflation. Year-on-year, we saw some profit contractions for each segment and seasonal earnings decline for automation and infrastructure along with mild interest in Power Electronics. So here, again, we provide a breakdown, a sales breakdown by segments for your information. So the nonoperating profit was around TWD 509 million in Q3. The significant decline in orders was mainly related to the loss -- mainly the loss related to the flooding in Thailand. So in Q3, we had TWD 8.3 billion profit before tax, down 27% year-on-year and 18% quarter-on-quarter. EBITDA in Q3 was TWD 12.7 billion, which was down 18% year-on-year and 12% quarter-on-quarter. Q3 CAS expense was about TWD 1.7 billion, representing a stable 20% effective tax rate. The net profit after tax in Q3 was about TWD 6.4 billion, down 50% Q-o-Q and 24% Y-o-Y. So the EPS in Q3 was 2.45. So now we will have a look at the accumulated numbers of year to third quarter. So year Q3 revenue was TWD 230.9 billion, up 13% from a year ago. Again, due to the increased prices in a variety of components and materials, GP margin in year Q3 slightly fell to 29.4% versus 30.8% a year ago, with gross profit up 8%. R&D expense as a percentage of sales fell to 8.8% from 9.1% a year ago while the SG&A as a percentage of sales also dropped to 10.2% from 11%. So the OpEx ratio in year 2 Q3 June from 19% from 20.1% a year ago. Due to the softer GP margin in Q3, the OP margin in year to 3Q slightly contracted to 10.4% from 10.6% a year ago, with OB increasing by 11%. So year-on-year, we found a pretty fast revenue growth for Automation and Power Electronics, followed by a mild improvement in Infrastructure. So profit-wise, except a little contraction for infrastructure, we found significant earnings expansion for Automation and some improvement for power electronics. So here, again, we provide sales contribution. I mean the breakdown by segment for your reference. In the year [ 2 ] Q3, we had about TWD 3.1 billion in net operating profit. And in total, we had TWD 27.2 billion pretax income, up 11% from a year ago. Our EBITDA in year 2 Q3 was TWD 40.1 billion, which was up 10% from a year ago. And the tax expense in the year 2 3Q was around TWD 5.5 billion, representing a 20.2% effective rate. So the EPS in the first 3 quarters was 7.91, up 14% year-on-year. So now we will answer the questions from the audience.

The first question will be for the short run. I mean, in terms of the Q4 of this year, how do you see the component shortage and cost inflation, also the power outage in China and increasing energy price, how do you see those impact on the short-run operations of Delta?

I think those are the headwinds for us in the near-term, especially for the cost inflations and the supply chain challenges because -- In the short run, I believe that the cost will remain at a higher -- relatively higher level. So the question is we need to discuss and negotiate with our customers about the cost sharing.

Okay. I have some points to add on. So in terms of the supply chain shortage or the supply shortage. I think that there is not only the direct impact on us. But also, there are some -- I mean supply chain challenge on the customer side. So for example, that taking our EV Solutions business, for example. So for example, because those OEM clients, they also suffer from the components and material shortage. So that which actually limiting our capability of delivering our products. So in that case, we are not able to -- even though we have healthy order flows, but we are not able to really deliver the products to our customers. So in order to be more conservative, we will write down some of the values of those inventories. So that is also some of the reason why we have a higher cost I mean, in Q3.

And the second question will be related to the chip shortage, especially for the global OEMs. When do you -- I mean, it's better to see it's easing? And what's the impact to Delta?

So the supply chain issues indeed has substantial impact on the vehicle assembling. And therefore, some of the customers, they may push the delivering of our products. It's very hard for us to forecast when the situation can be eased. So we can only do our best and do the things we can control.

Okay. So there are more -- some of the noises, I mean in the China market, including the power outage, including the increasing comparison base and the deceleration of the market growth. Can you talk about like do you see any changes in terms of the IA outlook in China? And what's your thought about the outlook for next year.

I think in terms of the sector nature, we are not the really power heavy industry. So we are really better. And also, we have prepared the power generators, the diesel power generators in each plant so we should be fine in their sense. Considering there are many headwinds in the China IA market at this moment, so we indeed see some -- we did show some deceleration of the whole market growth. But we think that the transformation in the transition of the manufacturers in China that is the trend of transition for the manufacturers in China remain -- still remain unchanged. So there are -- there might be some fluctuations in the near-term. But for the long-term trend, I think still remain unchanged.

So the next question will be, so how do you see the market demand for notebooks and servers. And how do you see the outlook for the last year?

I think in terms of the end customer size, I think for those people, they may need some new notebooks, they already got one. So but -- only in the channels, and they are still building some of the inventories. So in terms of the order flow, it's still looking healthy. So we do still expect the third quarter will be the peak season of this year. And if some of the orders being pushed to the Q4 because of the comp -- the suuply shortage. So will we see a better performance in the Q4 compared to the Q3. I think in terms of our order flow, it's still pretty healthy. But it's not only about -- I mean, the supply -- the component supply on our side, it's also about the component supplies, material suppliers on our customer side. So for example, if they have some components or material shortage, they may still push out some of the deliveries of our products. So it's hard for us to forecast the material supplies of our customers. So in terms of the cost sharing, you just mentioned with your customers, so how you see progress. Well, will we see the cost saving in the near-term. So we continue -- we actually have been continuing discussing and negotiating with our customers the cost sharing. And for some of the customers, we have already successfully increased our prices and shared the cost with them for many others, and we still need to discuss with the customers. And that is actually the nature of doing business because it's easier, much easier to cutting the price, but it takes longer term to increase the prices.

So how do you see the outlook for your EV chargers?

So this year -- I mean last year, this business was impacted by the pandemic. And again, this year, this business was impacted by the shortages, especially on the global OEMs. So we had modest growth for this business But as you can see, the EV -- I mean the cars are being more and more popular. So the need of charging facility will definitely go up. And if you look at -- if you look at the infrastructure expansion plans by the U.S. government, and they also -- they are also plan to invest a lot into the EV charging facilities. So even though that there might be some headwinds and macro headwinds coming in the near-term, but because we already have a full series of products. And then we also have -- we also supply or provide our products into the global main markets. So I believe that this business is going to be one of our growth drivers in the longer run.

So can you provide and give us some colors on your energy storage system business.

We have been already, I mean working on the energy storage systems for years. And then, we have also installed a couple of systems. They are with -- I mean over 1 million watts. And this is -- I mean, the energy storage system is also part of the Infrastructure And it's also subject to the power -- I mean, the battery cell -- the supply of battery cell. And I think that for the renewable energy, because the supply of renewable energy is unstable. So that is the main reason why the companies or we will need this energy storage system. And another reason is because the power companies, the electricity, I mean the company, they charge the users by different charge them by different level of power usage. For example, in the peak time, during the peak time, they charge you a higher rate in terms of the power usage and then in the other time, they charge you lower rate in terms of the power usage. So that's the reason why we believe the companies they will need energy storage systems especially when they're more and more focused on the renewable energy. In that case, the energy storage system will be a very important part of this whole infrastructure. So we are pretty positive about the long-term outlook for this business. But currently, because there is actually some tightness in terms of the battery supplies. So it still takes some time to see the meaningful growth of this business.

So how do you see the telecom power business and how does, I mean, the progress of 5G rollout?

I think we have answered this questions for many times even though many people have been talking about the 5G rollout, but the main reason still remains down the lack of [ material ] applications. So there are still very little breakthroughs in terms of the applications. But in terms of the 5G rollout last year, I mean, the whole environment was hurt by the pandemic. But this year, I think that we do see some improvement and recovery for the whole telecom power market, especially in the U.S. and in Europe.

So any improvements in the loss of your EV business? How do you see the outlook for this business in this year and the next year?

I think the delivery of our EV solution business has been kept by the supply challenge as well. And as I just explained, it's not only on our side and also because the shortage -- I mean, the component shortage on our customer side. So the delivery of our products has been, I mean, delayed and pushed out. But when the -- I mean, the whole supply chain ties being as gradually, I mean, going forward, I believe that we will continue to resume the fast growth of this business.

And can you further break down your EV solution business into different product segments?

We have -- in terms of the -- our products for the EV cars that we provide mainly 2 parts of systems. So 1 is the power management system and the other 1 is the traction motors and traction inverter, which is the power chain system. And besides on board like solutions like our power management solutions and the power chain solutions, for the vehicles, we also supply some of the cooling fans and passive components to the auto market as well. And in the longer future, when autonomous driving cars are being more and more popular, we may also integrate some of our network products because you need the communications on board and off board. So that is also the opportunities for us.

So the next question is related to your Delta Thailand subsidiary. So we saw some profit contraction this year for Delta Thailand. And when will we see the recovery of your gross -- GP margin?

I think we actually get recovered from the flood and dynamic very quick in terms of our internal operations. But in terms of the GP margins recovery, I think that we still need to wait until the ease of the whole supply chain disruption before we've seen a significant or meaningful improvement of the, its GP margin.

So can you talk about whether you still have like any ongoing projects, MMA projects.

So the MMA is the very important part of our long-term strategy is to support our sustainable growth in the long run. So we actually have a dedicated team continuing to concentrate in the project -- in concentrate in the projects and looking for the potential targets. So recently, we actually acquired a Canadian-based company called March Networks, which is a very experienced company providing surveillance service as a system. With -- so after integrating its operations with our building Automation business. I believe that, I mean, it's definitely going to improve our competitive advantages in our building Automation solutions.

And the next question is there is a car [ renting ] company. They actually ordered [ 10,000 ] vehicles from Tesla. Are you going to benefit from this?

We actually don't comment on any specific clients.

Sir, can you talk about your renewable and your businesses? And who are your competitors in this market?

So in terms of the renewable energy businesses, we provide the solar inverters and wind powers to the customers. I believe that our products and solutions can contribute a lot to the future smart grid because if you -- I mean, when there are more and more EV cars on the road, it's not going to work, I mean, with the current concentrated electricity networks. So I believe that, that is the future trend.

So can you talk about the new factory -- the 61 factory in Zhongli.

I think that because of the geographic, I mean tensions, some of the products for example the surveillance products of our building Automation business and networking products, they will be produced and manufactured in Taiwan rather than produced in China.

So the next question will be the CapEx for this year.

I think that because we are still building some new factories. So the CapEx for this year and the next year will be quite similar.

Do you have any plans? I mean, adopting the third generation of semiconductors materials?

So for the third-generation semiconductor materials, I think there are a lot to talk about. We have been watching the trend of the third semiconductor materials for years. And the applications, I mean, for those third-generation semiconductors, they will be used in higher frequency applications and for the higher output applications but the question still remains in terms of the supply is uncertain. But we'll keep an eye on the development of this.

Because of the whole supply chain issue, will you expect to see your inventory go up in the next year?

I think that still really depends on the whole supply chain situation. So if the revenues can go up or can grow faster, that we will see the -- in terms of the inventory stays go down in that case.

And the next question will be related to your passive component business. How do you see this long-term growth?

So for our passive components, I mean, in the old days, we mainly -- I mean they mainly supplied into the smartphone market and the mobile devices and notebook market as well. But in the future, we will supply more passive components to the auto market. And for the auto market, I mean, the nature is the beginning, I mean, it's the most challenging part I mean, when doing business with the OEMs. But I think that we have pretty much already. I mean, we have already pretty much got the qualifications. I mean from the customers. So I believe that our passive components business can ride market growth.

So can you talk more about your opportunity in the smart grid.

As I said, I mean, currently, the power supply, I mean, the electricity supply is still very central. It's central in the electricity companies. But in the future, the trend will be changed, and they will need more and more fragmented and energy supply and the smart grid. In order to fulfill the needs. So we don't really have much, I mean, exposure to the heavy applications for now, but we will continue to watch. I mean, keep an eye on this market.

Sir, can you talk about your customer base? I mean, for your EV charger business.

So there, in terms of customer base for our EV chargers, there is actually a pretty wide range. So for example, the OEM that we charge auto makers can be the customers and the operators can be the customer as well. And the government is also one of the customers and the end users are also more type of the customers as well. So in terms of the customer types, it's actually pretty diversified.

So the next question is, do you have any cooperation with Hon Hai for their MIH platform?

We don't have any -- I mean, for the time being, we don't have any cooperation with their MIH system for now. I think, we have answered like all of the questions we have on our hand. So if you don't have any other questions, I think we will just call you a day. So hopefully, we can see you in person if -- I mean the pandemic situation is away. So thank you for joining us today. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]