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

Hello, everyone. Welcome to our Q2 results conference. So as usual, we will have our IR running to record numbers, the financial numbers of Q2 and the first half, and then we will have the Q&A session. So please feel free to just raise your questions if you have any after the presentation. Thank you for your attendance today. So we haven't really have so many people with us, I mean, for the result conference -- thanks for coming. Okay. Before the presentation of financial numbers, we will have our CSO, Chief Sustainability Officer, to share our plan to -- of SBT net zero before the financial numbers. So the climate issue has been a really, really important topic for every country. So I believe that every company has their own plan toward this -- toward the goal of net zero. But some of them, they may be questioned about [Technical Difficulty]. So for this probably, we'll also share what we really do and what we really were on it with you. So let's just have [ the presentation from here ] first. So very recently, we just published our annual sustainability report just last week on our official website. So we have already passed the SBT net zero validation at the end of last year. We also announced our climate transition plan, and we are committed to the climate transition tower 2050 SBT net zero. We actually -- initially, we have submitted our SBT target in 2017. We were committed to achieve like -- to reduce like 56.6% of our carbon emission by 2025. But in reality, we actually reached and achieved this goal -- sorry, 4 years ahead of our schedule. So that's why last year in 2022, again, we submitted our new target to SBT and also got the validation -- official validation from SBTi. So our new plan for the next phase is we are going to -- we are targeting to reduce like 90% of our carbon emissions, I mean, Scope 1 and 2. And then we also aim to reduce another 25% of our carbon emission in Scope 3 by 2030, and that would be our short-term target. And then for the long-term target, which is in 2050, we actually plan to reduce like 90% of the carbon emissions, I mean, in Scope 1 and 2 and 3. And that is actually in line with the SBT methodology, which allows all the -- I mean, other organizations, enterprises to reduce at least I mean, 90% of their carbon emissions. And therefore, the very last 10% of the carbon emissions, it is allowed to use other projects or other methods just -- such as using or the [ carbon zinc ] or like the carbon credits to achieve the final 10% and the last mile of this net zero. And therefore our transition -- climate transition plan is actually aligned with the SBT methodology aim to control the temperature increase. I mean, global warming within 1.5 degrees Celsius. As you can see from the figure, so in 2022, we have already successfully reduced our market base carbon emission by 13.5%. In terms of our achievement rate of the renewable energy adoption, so as you can see from the graph, in 2021, the adoption rate of renewable energy within our global operation sites was about 55%. And then in 2022, we target to achieve like 60% of renewable energy usage. But eventually, we actually achieved 63%, which was also ahead of our schedule. As mentioned at the beginning, we actually take it very seriously to avoid any possibility of any form of greenwash. So what we do here is our plan is completely aligned with the United Nations integrity matters report. So we have been always -- we have always watched this very closely to avoid any possibility of greenwash over announcement. So here, we also provide a table for your reference, so I think that we are doing okay here. So as usual, our financial numbers are recorded based on IFRS and all the consolidated numbers have been reviewed by CPA. So the Q2 revenue was TWD 100.5 billion, representing a 12% year-on-year growth and an 8% sequential increase, which was seasonal. Gross profit in Q2 grew by 11% year-on-year and 15% quarter-on-quarter. GP margin in Q2 improved to 29.2% from 27.5% in Q1. Thanks to the better scale, but I mean that was mainly related to the better scale, but the GP margin in Q2 slightly dropped from 29.4% a year ago, mainly because of the unfavorable product mix this year. Q2 expense was up 14% year-on-year and 11% quarter-on-quarter. As a result of more business travels and wage increases for the engineers, especially R&D spend in Q2 grew slightly faster than the SG&A. R&D as a percentage of sales was 8.8% versus 8.3% in Q1 and 8.5% a year ago. SG&A as a percentage of sales remained at 10.2% compared to Q1 but slightly expanded from 10.1% a year ago. So the Q2 OpEx ratio increased to 19.0% versus 18.5% in Q1 and 18.7% a year ago. So the Q2 operating profit was up 7% year-on-year and 22% quarter-on-quarter. OP margin also improved to 10.2% versus 9.1% in Q1 but dropped from 10.7% a year ago due to the lower GP margin and the higher OpEx ratio. So the sales wise, we actually found the fastest growth from Power Electronics, mainly related to the strong expansion in the EV component business and a healthy demand for power supply business as well, followed by the Automation segment, where i.e. moderately improved from a low base, the Building Automation decelerated compared to last year. Within Infrastructure, the EV Charger business was strong, but the Telecom Power business was sluggish due to the weakness in the underlying market. So earnings-wise as due to improvement in the EV Component business, we found a substantial year-on-year expansion for Power Electronics, but some product contractions in Automation and Infrastructure, owing to the profit decline in IA and ICT business. So Q2 nonoperating profit was TWD 1.6 billion, which was similar to Q1. So in Q2, we had TWD 11.9 billion profit before tax, up 10% year-on-year and 20% quarter-on-quarter. Here, we also provided EBITDA numbers for your reference. And then Q2 tax expense was about TWD 2.4 billion, representing a 20% effective tax rate. So Q2 net profit after tax was about TWD 8.1 billion, up 7% year-on-year and 18% quarter-on-quarter. So the Q2 EPS was TWD 3.14. And then we will have a look at the accumulated numbers of the first half. So the first half revenue was TWD 193.5 billion, up 12% from a year ago. Gross profit in the first half was up 12% year-on-year as well with a GP margin of 28.4%, same as a year ago. So the operating expenses in the first half was up 14% year-on-year, where the SG&A up 14% and R&D up 13%. The OpEx ratio moderately increased to 18.7% in the first half from 18.5% a year ago. And then the SG&A as a percentage of sales grew to 10.2% from 10% a year ago, while the R&D expense ratio also increased to 8.5% from 8.4%. So the operating profit was up 9% year-on-year, while the operating margin slightly moderated to 9.7% from 9.9%. So segment-wise, we found a decent sales growth almost across the board, with the Power Electronics and Automation growing faster than Infrastructure. Profit-wise, we saw a significant earnings expansion in Power Electronics and had some profit contractions in Automation and Infrastructure. And thanks to the improvement in the investment gains and interest income. The nonoperating profit was TWD 3.2 billion versus TWD 2.2 billion a year ago. So in first half, we had TWD 21.9 billion pretax income, up 13% from a year ago. So in the first half, the tax expense was about TWD 4.4 billion, representing a 20% effective rate. Therefore, the net profit after tax was TWD 15.1 billion versus TWD 13.7 billion a year ago. So the EPS in the first half was TWD 5.80, up 10% from a year ago.

For the question -- I mean for the first question from the audience.

After many automakers have announced their adoption of charges [ tender ] of Tesla for the North American market is likely to have a significant impact on the industry's development. This production indicates a shift towards a standardized charge infrastructure. So is it possible that the market will slow down temporarily due to the product modifications and resulting in the short-term shipping gap? And then what kind of the impact would this have on your business?

And then for this question, I actually also consulted our engineers. So for the CCR standard and in our standards, the only difference is actually at the connector. So there is actually not really high barrier in terms of technology or the product design. So because Tesla actually announced that they will open their IPs to everybody outside of its ecosystem, so, so far, we don't see a significant impact on our business, I mean, as a supplier. So I do believe that there is going to be some consolidations, I mean, some consolidation in the market. And that is actually also good for the market development. Maybe in the near term, we will see some of the customers, they might be more hastened because they are still going to observe this trend. But for the long run, we do believe that this kind of consolidation is actually good for the overall market development.

So the next question is about the AI servers. During the shareholders meeting, it was mentioned that there are many opportunities in the AI server power supply business. Can you give us more color about the orders, the outlook for the next year and the year after?

So before answering this question, I would actually like to ask the question. So how we can really define the definitions of AI servers? As far as I know, if I -- I mean, go to ask like 3 engineers, like each one of them, they may just give me or give us like different definitions of the AI servers. So you may define AI servers are those servers with graphic cards and with GPUs, specific GPU. So for our power supplies, I mean, we actually have been shipping to many data center clients. So we don't -- to be honest, we don't really know how they really, I mean, utilize these products, but either they are for the AI servers are not for the AI servers. So I do believe that -- I mean, the development of the AI server or this whole AI application is still in the very early stage of its development. But currently, the AI server, as a percentage of total number in the server market still holds a very [indiscernible] now. And the business models of AI operators are not yet well defined. So the trend, I do believe is going to be more volatile rather than a straight line up. So I think some people may also concern about the development of AI technology will go into to take over some of the job opportunities from human beings. But personally, I do believe the AI development or the AI applications is going to create more job opportunities than -- I mean, taking over the job opportunities from human beings. It will also increase our productivity at the same time, so we are really -- we are kind of optimistic about this trend. So [Technical Difficulty] servers, I think generally speaking, they are all higher than the conventional powers so -- because the [ past ] requirements for the AI servers are much higher than the conventional servers, so supposedly, the margins and ASB of AI servers of our products are also higher than the conventional servers.

And then could you please share your view on the growth and the profitability of the EV component business this year. Has it already exceeded the company's initial expectations?

I think in the first half of the year, revenue from the EV component business has largely met [Technical Difficulty] I mean, our expectations. And then for the second half of the year, we do believe the customer demand has remained quite strong, so we shall continue to sustain a healthy growth for this business.

And therefore, as for the business opportunities for AI server coolings, have you benefited from it? Can you share with us your progress on this technology or this business?

So as a major player in data gas center cooling solutions, we do have many projects in hand. And then currently, even though there are various new cooling technologies -- I mean, in the market, but each one of them actually has its own advantages and disadvantages, making the direction less clear in the short term. And now on the other hand, we also offer, I mean, various products to customers, not only the liquid cooling solutions, but also the traditional air cooling as well as the single phase or 2 phase liquid cooling liquid solutions.

And then the overall server market seems to see weaker demand in the first half of the year, how is the business in this area? What are the preparations for the market [Technical Difficulty]?

Year-to-date, the growth momentum of our traditional -- of the traditional server market has indeed slowed down compared to 2022. One of the main reasons could be the backlog of orders from 2021 have been largely fulfilled last year. But for the long run, we do believe that this business is definitely -- I mean, will continue to grow. But just for the short term, I think it's actually going to gradually bottoming up. For the overall server market this year, we might see some modest recovery last year for the overall server market.

Okay. Is there any sign of recovery in the China IA market?

I think in the first half of the year, the China IA market seems to have shown some signs of slow recovery. Initially, it was expected that the easing of post pandemic restrictions will lead to increased demand. However, in reality, the overall business environment is still adjusting. So there hasn't been a significant improvement in the industrial demand. Our business in this sector grew by 13% in the first half of the year, which is in line with the performance of our competitors. But despite the fact that the second half of the year may have a lower comparison base, [Technical Difficulty] so making it challenging to anticipate an acceleration.

So how do you see the consumer market?

I think the market -- the overall market has been gradually entering to the late stage of the whole destocking process. We don't really expect, I mean, the consumer market is going to see any kind of, I mean, significant recovery, but I think it's actually going to stabilize pretty soon.

So your -- one of your main competitors in the Power Supply business recently just announced their -- the results of Q2, and then they actually improved their margins and profitability this year. So do you have any comment? And what do you -- I mean, what's your view on your own profitability?

We don't comment our competitors' performance, but we are happy for them. And then for our own GP margin, I think in the long run, we always expect to at least maintain a 30% level GP margin level.

And could you please share about the details of your CapEx plan for this year and for the next few years?

So we are actually building our -- some of our office buildings and expanding our production lines in different areas. So for example, we not only have new construction plans in Taiwan, but also in China and Europe. And then we are also planning to have another 2 new factories in Thailand and then we also are going to complete the construction plans -- constructions for the new factories in India. And the capacity for the India from the India factories are mainly for the domestic market in the initial stage.

Okay. Please, I mean, share us a rough idea about like what the average voltage of AI servers will be? And then from the previous conference call, you actually mentioned because the EV component business is going to outgrow other businesses this year. So that actually put some pressures on the GP margins, but considering that the AI servers or the server powers for data centers actually has also been growing this year. Is that going to help on your overall GP margin?

I think in terms of the average voltage of AI servers is really subject to the architectures of different data centers. So in the old days, the power outage of servers were normally within the 1,000 to 2,000 watts range -- in the range of 1,000 to 2,000 watts. But nowadays, I think many of the -- sorry, the power outage of -- power voltage of many AI servers or the data center servers actually within the range of 3,000 to 4,000 or even like 5,000, 6,000 watts per unit. So for GP margin, I mean, of our EV component business, I think our strategy is very simple. We would like to enlarge our scale to improve our profitability -- the overall profitability of this -- for this business. But I can be sure that even in the long run, for this business in terms of the GP margin, is never going to be like 30%, 40% or like higher than other businesses. But there is still room for us to have some -- to see some upside potential for the profitability for this business. So currently, the overall server power supplies actually accounts for like nearly half of our Power Supply business.

So my question will be related to the Telecom Power business. So as far as I know, this business, I mean, in terms of your market demand has been pretty weak in these 2 years and then it even becomes a drag on your margins -- OP margin. So do you have any plan or any kind of any approaches, strategies to improve this kind of situation for the Telecom Power business?

So I think for the Telecom Power business, this market is actually -- the nature of this market is pretty cyclical. So it's not like, okay, this business or this market is going to be saturated or to be more commoditized. It's just the nature of it is just more cyclical. So for the second question related to the EV business. So strategically, we actually tend to work with the European or the Western OEMs in terms of the clientele. But many of our clients, they actually also have joint ventures, I mean, in China. Currently, we don't really have many [indiscernible] as our customers. I think there are many reasons. The competition there is much more fierce, especially the market itself and also the customers, they are more pricing sensitive by nature, but our advantages has always been on the product development and technology. So if the clients are more pricing-sensitive, it's actually hard for us to really differentiate ourselves and then also to protect our margins. So that's the reason.

Okay. The next question is, do you have any plan to further increase you shareholding data [indiscernible]?

No, we don't have that plan now.

So some people said that you have the penetration into the -- one of the major Japanese OEMs. Could you please share the details of it?

Sorry, we don't comment on any specific clients.

So could you please share your view on the profitability of your EV component business? Given its margin -- its margin is lower than your company average, I think even though by nature, the margin of EV business is going to be dilutive to the overall GP margin. But on the bottom line level, when we see the -- I mean, much better scale and much better -- and much more sales contribution from the EV business is still going to be very beneficial to the bottom line and to the absolute profit. So can you share your plans on the capacity -- the new capacity, I mean, Delta Thailand?

I think some of them or like a big part of it is actually for the EV business. Because for many of the EV component business, we are actually the sole source, I mean, to the clients. So we got to be prepared for that.

Can you please share your view on your Automation segment, both for the Industrial Automation business and the Building Automation business?

So I think our idea for the -- I mean, by nature, these 2 business or these 2 markets are quite different. In terms of the product design for the Industrial Automation market, from product to product from component to component for different sector of different retail could be variant. But in Building Automation, the products or components are more generic. So the key is more about the integration of different products on the software side as well. I think we're building automation as there is actually growing consciousness about the energy efficiency of the buildings. And we also see some -- I mean, some many countries, their governments have already set up some new policies regarding the energy efficiency of buildings -- of the new buildings. So -- and the improvement of the energy efficiency is actually our expertise. So that's the reason why we have this focus on the Building Automation business. And then I do believe that we will have many opportunities in our Infrastructure business -- Infrastructure segment, not only on the Data Center Solutions side, but also on the Energy Infrastructure segment, including our Energy Storage System business and our EV Charging business as well. As there are going to be more and more electric vehicles on the road, the importance of micro -- the development and construction of microgrids is also growing substantially in order to deal with this kind of, I mean, challenging.

So can you also please tell us or give us some idea about your Energy Storage System business?

As we actually as planned before, it's not going to work. I mean, for renewable energy or the microgrid infrastructure is not going to work without the help of Energy Storage Systems. The Energy Storage Systems can actually not only, I mean, can help to save the energy during the data, for example, I mean, from the solar systems, but also, you can quickly or rapidly charge and discharge from the grid. So it's not going to work. I mean, for -- without the help of the Energy Infrastructure -- Energy Storage System. So in Taiwan, in 2024, there is going to be a new policy, I mean, in terms of the carbon fees. I mean, currently, as we just, I mean, elaborated at the beginning of this meeting because we have already used, I mean, like -- or the renewable energy has already accounted for 63% of our total electricity usage. And for this year, we actually target to achieve maybe 80% of the renewable energy usage. So I think it's not going to have, I mean, any kind of substantial impact on Delta. But of course, we would also like to help the supply chain to moving toward this renewable energy trend and also moving toward to the carbon neutrality, and then we do believe that this is our responsibility. And as you can see from the presentation, actually -- at the beginning of this presentation, I actually mentioned the carbon emissions in Scope 1 and 2 and 3. So for the Scope 1 and 2, that is mainly related to the carbon emissions within the enterprise or corporate itself. But for the Scope 3, it's more related to the value chain. So it's not just, I mean, our responsibility to help our suppliers or customers to reduce their carbon emissions. In order to achieve our carbon emission target for the Scope 3, we will also need to do that. So that would be one of our major focuses in the next stage because we have already done quite a lot for the Scope 1 and 2.

So the last question will be what will be your growth drivers in the future?

So for the growth drivers, I think the EV business is definitely going to be the growth driver for the near term and for the mid term. And then for the Data Center and Energy Infrastructure, as I said, I do tend to believe that there are going to be our mid- to long-term growth drivers in the future. And therefore, the -- within Automation segment, I think the Industrial Automation business is going to be more steady growing and then even for our component businesses, such as our cooling fan business and our Power Supply business. As we also have -- I mean, the penetration into many new applications and also to the growing areas such as Data Center. So we do believe that we are going to have pretty decent growth in the long term.

So do you have any idea about your market share in terms of your power supplies in the AI server market?

I think as I said at the beginning, because the definition of AI server is actually pretty vague, so it's hard to really calculate the market share of the product.

So for the AI server -- my questions is still related on the AI servers. So do you have any specific numbers, just like -- okay. So how -- so what is the growth rate you expect for this AI server? How is your power supply for the next year?

I know that everyone actually is highly interested in the AI server market. But still, I think the AI operators will still need to figure out the business models. So I think we are actually just in a very initial stage, I mean, of this AI development. So at least from my point of view, there still isn't any kind of material applications for the AI. So as I mentioned, I think despite of the fact that many hyperscalers have been aggressively investing into the AI server deployment, but still, because this market is still evolving, so I think it's really hard for anyone to calculate the market share or to calculate aggregate number of AI servers. But for the EV trend, it's actually more clear because the churn in the market is actually to integrate like a few components together by, maybe 3 in 1 or 4 in 1. That advantages and the strength, I mean, integrate many components within one bus. We can make the products much lighter and much smaller. Of course, the technology, I mean, barrier -- the technological barrier is much higher than making discrete components. So thank you for coming today. So all the best. [Statements in English on this transcript were spoken by an interpreter present on the live call.]