Delta Electronics Inc

TWSE:2308

Earnings Call Transcript 2020-Q2

[Ying Jun Hai, executive]

Hello, everyone. Welcome to our second quarter 2020 investor conference. So we have released our financial results of the first -- sorry, the first half and the second quarter of this year.

But as usual, we will have our IRO, Rodney, to present the financial numbers of Q2 and the first half. And after that, you may raise your questions during the Q&A session.

[Rodney Liu, executive]

So as usual, so I'm going to report the second quarter and first half financial numbers before the Q&A session.

So with regards to our sales revenues, with the mix impact from COVID-19, Q2 revenue was up 27% year-on-year and down 4% quarter-on-quarter -- sorry, my mistake. Our second quarter revenue was up 27% quarter-on-quarter and down 4% quarter -- year-on-year.

So in terms of our gross profit, thanks to the better product mix and some cost reductions, our gross -- our GP margin in Q2 set a record high -- set a new record at 32.9%, with gross profit up 58% quarter-on-quarter and 17% year-on-year. And with the COVID-19 impact on the business trips and many trade shows, our Q2 SG&A was down 10% year-on-year and only up 3% quarter-on-quarter. And our R&D expenses in Q2 also just moderately increased by 6% year-on-year and 17% quarter-on-quarter. So as a result, R&D expenses, as a percentage of sales, decreased to 9.2% in Q2 from 9.9% in Q1, while it increased from 8.3% a year ago.

SG&A as a percentage of sales dropped to 10.6% from 13.6% in Q1 and 11.4% a year ago. So the OpEx ratio declined to 19.8% in Q2 from 22.9% in Q1, but slightly increased from 19.7% a year ago. So thanks to the historical high gross profit and the lower OpEx, OP margin in Q2 hit a new record high at 13.1% compared to the 3.6% in Q1 and 7.3% a year ago.

So in terms of the performance by segment, revenue-wise, with normal low base in Q1, we saw significant sequential growth for all segments, which were 32% for Power Electronics, 24% for Automation and 21% for Infrastructure. So year-on-year, we benefited from the work-from-home demand and the recovery of China IA market. Therefore, we had a benign growth for both Power and Electronics and Automation segments, which were 4% for Power Electronics and 6% for Automation, mainly coming from our cooling fans passive components and IA businesses.

And then our power supply business was relatively flattish while on-board EV solutions were suffering from the global shutdown of OEMs. So with the slow demand in telecom and EV charger, networking and display markets, the sales of overall infrastructure dropped by 18% on a year-on-year basis. Though data standard business was relatively strong, earnings-wise, with the reductions in both cost and incentive size, we had pretty strong profit improvements across the board. So the percentage of Power Electronics increased to 54% in Q2 from 51% in Q1 and 49% a year ago.

Automation was slightly down to 15% in Q2 from 16% in Q1, but up from 14% a year ago. Infrastructure contracted to 31% in Q2 from 33% in Q1 and 37% a year ago. And non-operating profit was around TWD 929 million in Q2, which was within the normal range. The TWD 7.1 billion of operating profit in a year ago was mainly because of the one-off and noncash disposal gains of DET, which was basically an accounting treatment.

So in Q2, we had TWD 10.2 billion profit before tax, and our EBITDA in Q2 was TWD 14.2 billion. So our Q2 tax expense was about TWD 2.1 billion, representing a 20% effective tax rate. The net profit after tax in Q2 was TWD 7.6 billion. So the EPS in Q2 was 2.9 -- TWD 2.92. If we exclude the one-off disposal gains from DET, Inc. the second quarter of last year, Q2 EPS grew by 52% on a year-on-year basis.

And now we have a look at the accumulated numbers of the first half. So the first half of revenue was TWD 126.4 billion, down 1% from a year ago. With the bad term mix and some cost reductions from production, GP margin in first half set a new record at 30.1% from 26.7% a year ago.

R&D expenses in first increased by 11% to 9.5% as a percentage of sales from 8.5% a year ago, mainly because of the consolidation of DET. Being impacted by COVID-19, SG&A number in first half decreased by 1%, but the ratio was slightly increased to 11.7% in Q2 from 11.5% a year ago because of the unfavorable scale. So OpEx in first half moderately improved by 5% to 21.2% as a percentage of sales from 20% a year ago. So with the advantages of GP improvement and benign growth of OpEx, the operating profit in first half increased by 32% year-on-year, and the OP margin expanded to 8.9% from 6.7% a year ago.

So thanks to the strong work-from-home demand, year-on-year, we saw the most significant sales and profit increase in Power Electronics, followed by Automation segment. However, we saw both sales and profit contraction in infrastructure due to the slow market demand.

So in first half, we had about TWD 1.8 billion nonoperating profit. The significant drop from a year ago was mainly because of the one-off disposal gains from DET.

So in total, we had a TWD 13 billion pretax income, and our EBITDA in first half was TWD 21 billion. So the first half tax expense was around TWD 2.7 billion, representing a 20.6% effective tax rate.

So as mentioned, if we exclude the one-off disposal gains from DET, the EPS in first half was up 15.5% to 3.72% from 3.22% -- sorry, from 3.22% a year ago.

[Rodney Liu, executive]

Okay. So my first question would be, can you share us about your guidance and also outlook for the first-- for the third quarter and the fourth quarter?

[Ping Cheng, executive]

So I think that -- I mean with -- in terms of the sales number, the third quarter should be better than the second quarter. But for the fourth quarter, it's still too early to say because there are still many uncertainties.

But in terms of our GP margin, we hope to maintain at 30% or above level.

[Ying Jun Hai, executive]

Okay. So for your question regarding our passive components, component business. So I think the passive components business, I mean, in terms of the cost structure, is a bit different from our other businesses. So for example, compared to many of our other businesses, our passive components business is more capital intensive.

[Rodney Liu, executive]

So the depreciation accounts for a big part of the cost for our passive components. So the utilization rate is actually pretty critical when we look at the GP margin of our passive components.

But currently, as far as I know, the utilization rate -- sorry, I mean...

[Ping Cheng, executive]

Our capacity for the passive components is fully utilized currently. So I think that is also why the reason that our -- the gross margin -- the GP margin for our passive components in first half was better than the historical numbers.

So with your concerns on our expenses controls. Yes, with the impact, I mean, from the COVID-19, many business trips and trade shows have been suspended for a while. So after the COVID-19 is over, I think that we still need to invest into this SG&A. For example, that we still need to travel and to host this kind of trade shows in order to approach new customers and promote our new products.

So in terms of our -- I mean subsidiary, Delta Thailand, yes, after we acquired or increased our shareholdings in Delta Thailand for over 1 year, the production quality -- the current production quality is much better than the beginning. And their business is also growing quite nicely this year. So if we can keep this trend, I think the outlook for Delta Thailand should be quite nice for this year.

So in terms of our new factories, I mean, construction projects in India because of the -- I mean the sudden outbreak of COVID-19, there was some delay of our construction projects. So after this, I think that we will be able to catch up.

[Ying Jun Hai, executive]

Okay. In terms of the capacity plan or allocation between India and Delta Thailand, actually, after we have increased our shareholdings in Delta Thailand, after a year, that we actually made a lot of efforts on improving their production quality and efficiency. So actually, we implemented a factory -- a project of factory automation, just like what we have done in our China markets -- China factories. So I think that is also one of the reasons that you see the improvement or expansion on the GP margin of Delta Thailand.

[Rodney Liu, executive]

So -- because some people are worried about it, if there was some delay -- and there is delay off our factory construction in India. So what about the capacity?

[Ping Cheng, executive]

But after we have streamlined the production line in Thailand, we've find -- we actually found out that we don't really have the urgencies to -- for a massive, or a further capacity expansions for now. We can still like release some capacity by streamlining the original stream -- production lines in Thailand. So I think that you should be [ flying ].

[Ying Jun Hai, executive]

Okay. So for your questions regarding our EV Solutions business. Actually, even with the lockdowns of many cities in U.S. or European countries, our EV Solutions business in the first half is still -- was still doing okay. So after the release of the lockdowns, I think that -- and the reopen of our many OEMs, I think that our EV Solutions business is going back on track for the rest of the year.

[Rodney Liu, executive]

So the next question would be the current progress of your on -- above your on -- about Delta's factory automation.

[Ping Cheng, executive]

So I think for this project, I mean, factory automation project within our own factory is still in progress. But because of the pandemic of COVID-19, so our many -- many of our team members who are dedicated for this factory automation progress were not being able to really visit it -- to visit the factories in China or other regions.

[Rodney Liu, executive]

So for your question regarding the -- how many labor -- I mean -- can you share how many labors have been saved or deducted from this factory automation progress?

[Ying Jun Hai, executive]

So I think when we look at the performance of the factory automation, we can't just see -- I mean we can't just focus on all EBITDA -- the number of direct labors. Because when you implement more equipment or devices into factories, actually, you will need to hire more, like, indirect workers in order to maintain the equipment. So when we look at this, the performance of the factory automation, so I think that you need to combine the direct laborers and overheads together.

So if we look at our conversion costs for this year, that conversion cost is 1% or less than 1%.

So in terms of our data center solution business, actually, the data center market -- or the business is basically on the upward trend. So yesterday, I just talked to [ Ann and Ashford ] in the telecom market. So we just had the discussions. The data -- the underlying market of data center might be growing by like double digits for the next few years.

In the products we provide to the data center market, it's basically the energy management solutions. So right now, the data center, the total power consumption of data centers accounts for like 2% of total of global energy consumption. But in the future, maybe like just 50 years later, it might be -- the number might be like 15% of global power consumption.

[Rodney Liu, executive]

So where is just where we can make efforts or contributions for our customers around the globe?

[Ying Jun Hai, executive]

Okay. So for the EV -- EV Solutions business.

[Ping Cheng, executive]

So as I just mentioned earlier, that with the impact being impacted by the COVID-19, many cities are locked down -- were locked down, especially in the first half. So even then, we have -- we actually have many project wins at hand, but we were still not able to ship our products because even our -- I mean our customers, those OEM guys, they actually just shut down their factories in this year. But because of -- we still -- but because we still have many project wins, so I wouldn't be too worried about this business. I think we should be okay.

[Rodney Liu, executive]

So the next question would be, would you be considering that looking for or doing more acquisitions during COVID-19 when the valuations are relatively lower?

[Ying Jun Hai, executive]

Yes. Certainly. I think that acquisitions is part of our growth engine. I mean for the long term -- so of course. So when the macro environment is slow, there might be more available targets in terms of the acquired companies. But also, those kind of companies, they might be weaker than others as well. But because we -- I mean for ourselves, Delta, that we all lead to strategic acquisitions. So we are not going to buy a company just because the price is reasonable and the valuation is reasonable. So we still need to consider the synergy.

So if you ask me about the outlook or are there any growth driver for next year, I think there are still many uncertainties, especially, I mean, during this macro environment. But I think some chances are still pretty clear. For example, the factory automation and -- or what we call Industrial Automation, is definitely the trend there. And then EV is definitely on the upward trend, that's for sure.

So if you look at those traditional OEM guys, they are -- I mean making many efforts into this EV market as well. So -- and the 5G is also there. But the problem that is still that -- I mean for the vendors or the operators, they still need to find out some killer applications in order to really see the market flying to -- I mean before we really see the market taking off. So -- and also the passive components and the cooling fans or -- I think there -- those are the -- those might be the growth drivers for the longer-term list for next year.

[Rodney Liu, executive]

So can you share, like, do you have any new products or new products in your Industrial Automation business?

[Ying Jun Hai, executive]

So I think that, as I mentioned, that the software is going to play a more and more important critical role in our Industrial Automation businesses. Because if we want to fully realize the goal of highly automated factories, the computation between the equipment and equipment is pretty important.

[Rodney Liu, executive]

So is there any impact on you like -- because of the recent Huawei issues?

[Unknown Executive]

So I don't see any significant impact on us because Huawei is both our competitor and our customer. But I think that we only compete against our -- in our telecom power. But our products, I mean, the telecom power is highly competitive in like almost every regions or markets, so I don't think there will be any big issues on this.

[Judy Wang, executive]

So if you ask me like our financial goals, for example, such as our ROA and ROE, our GP margin and OP margin, I would say that, of course, we do have our internal expectations for our ROA and ROE. But for the GP margin, OP margin, that -- so if you look at our GP margin for this quarter, that you will see that, just as we always communicated, our goal is to pursue higher GP margin by providing more higher -- more value-added products and solutions to our customers. So that's what we did.

And then also, because of the impact -- I mean from the COVID-19, so we had like lower OpEx in the second quarter. But after this, we still need to invest into R&D and SG&A afterwards.

But I think that our direction is pretty clear that we would do the necessary investments for the future sustainability. But we would still have an eye on our internal financial targets.

[Rodney Liu, executive]

So because many European countries, they are providing more subsidies for the EV -- for EV makers. So do you see there -- do you see that as a tailwind for your EV solution or EV charger businesses?

[Ying Jun Hai, executive]

So I think, I mean, sure that if the government is providing more subsidies for the EV maintenance that we will be benefiting by somewhat degree. But because of the impact of COVID-19, and some of our customers today are still -- I mean their factories are still closing up. So I think that things will become more clear after they reopen factories and reopen the business.

[Rodney Liu, executive]

So can you please talk about or share your view on the resupply chain, the impact, I mean, from the resupply chain?

[Unknown Executive]

Yes. The resupply chain is a pretty hot topic. I mean currently, I think it is not just happening more recently. In every markets or regions, they are always competition -- there is always competition. So I think the core is still how to add more values to your customers.

So if you look at our R&D investments for this year, you can actually see that we didn't really, I mean, cut down any investment on our innovation and R&D. So -- which means that we always try to provide better products and -- or like more value-adding solutions to our customers. That's how keep our competitive advantages. So we are not like some of the peers. They compete just with their lower prices of similar products. So I think that that's my answer for the resupply chain.

[Rodney Liu, executive]

So do you think that work-from-home change can be sustainable?

[Ying Jun Hai, executive]

So I think that as we just talked about this at the beginning of the meeting, so the strong demand for notebooks we're barely driven by the work-from-home change at this moment. But even if there any -- I mean U.S. companies, they just announced that their workers can stay work from home, like, for, say, another year. But I think that when many people they have replaced or just bought new laptops, that are not going to buy a new one like in -- I mean just in the near term, so we would be more conservative about the trend.

[Rodney Liu, executive]

So I think that -- those are all the questions.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]