Delta Electronics Inc
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Delta Electronics Inc
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Welcome to Delta's Investor Conference today. So as usual, we will have our IR, Rodney, to report the Q2 financial numbers to you. Then we will have the Q&A session. So you may raise your questions through the platform. And then they will be answered during the Q&A session.
So now we are going to review the financial numbers of Q2. So the numbers are all have been reviewed by CPA. So in Q2, we had TWD 90 billion sales revenues despite the impact of the COVID control in China early this quarter. We soon recovered and resumed some growth after May. With the better component supply, we had 14% year-on-year growth and 9% quarter-on-quarter increase in Q2. Thanks to the better scale and more pass through of the cost increases, GP in Q2 grew by 12% year-on-year and 18% quarter-on-quarter. GP margin also improved to 29.4% in Q2 from 27.3% in Q1 and 30.1% a year ago.
So in terms of the expenses. With more marketing events and business trips after reopening, Q2 expense as a whole grew by 13% year-on-year and 12% quarter-on-quarter. Wage inflation was also a reason for both R&D and SG&A expenses to increase by the teens in Q2 compared to a year ago and to the previous quarter. So ratio-wise, the R&D expense as a percentage of sales shrank to 8.5% from 8.8% a year ago, but slightly increased by 0.2 percentage point from 8.3% in Q1. SG&A as a percentage of sales remained at 10.1%, the same as year ago and only slightly increased from 9.9% in Q1. So the Q2 OpEx ratio dropped to 18.7% from 18.9% a year ago, but moderately increased from 18.3% in Q1. Therefore, the OP margin in Q2 improved to 10.7% from 9.0% in Q1 and slightly declined from 11.1% a year ago.
So year-on-year, we found moderate growth in each segment with Infrastructure recovering from the low base and growing faster than the other 2. Otherwise, we also saw strong year-on-year improvements in Power Electronics thanks to the better component supply this year and the pending demand from last year. Sequentially, all segments resumed some growth after the COVID control in China. Earning-wise, except for the Automation segment, which was significantly impacted by the COVID control, we found different degrees of improvements for the other 2 segments with Power Electronics increasing by 29% versus a year ago and Infrastructure growing by 4% compared to last year. Sequentially, the profitability of all segments improved substantially in Q2.
So here, we provide a revenue contribution breakdown for your reference. So the nonoperating profit was around TWD 1.2 billion in Q2, attributable to the foreign exchange gains largely from the depreciation of the Thai baht and some various charges on customers. We had a small interest expense instead of the usual income as a result of the expanding spread between the borrowing and the deposit rates. With interest rates likely high converter, we may continue to see small interest expenses before the reversal of the environment.
In Q2, we had TWD 10.9 billion profit before tax, up 27% quarter-on-quarter and 7% year-on-year. EBITDA in Q2 was TWD 15.6 billion, up 18% quarter-on-quarter and 9% year-on-year. So in terms of the Q2 tax expense was about TWD 2 billion, representing 18% effective death rate. The net profit after tax in Q2 was down about TWD 7.6 billion, up 26% quarter-on-quarter and 1% year-on-year. So the EPS in Q2 was TWD 2.94.
Now we will have a look at the first half numbers. So first half revenue was TWD 172.5 billion, up 14% from a year ago. GP in the first half was up 8% year-on-year, with a GP margin of 28.4% versus 29.9% in the first half of last year. The operating expense in the first half was up 10% year-on-year, with SG&A up 11% and R&D up 8%. With a better economic sale, the OpEx ratio shrank to 18.5% in the first half from 19.2% a year ago. SG&A as a percentage of sales dropped to 10.0% from 10.3% a year ago, while the R&D expense ratio contracted to 8.4% from 8.9%. So the OP was up 5% year-on-year, with OP margin dropping to 9.9% from 10.8% due to the lower GP margin in the first half.
By segment, we found this revenue growth across the board profit-wise, other than Automation, which was significantly impacted by the COVID situation in China. We saw some profit expansion. So here, again, we provide a sales percentage breakdown for your reference. In the first half, we had about TWD 2.2 billion nonoperating profit, which was literally lower than last year. In total, we had TWD 19.4 billion pretax income, which was up 3% from a year ago. Our EBITDA in first half was TWD 28.7 billion, up 5% from a year ago. The first half tax expense was around TWD 3.7 billion, representing a 19% effective rate. Noncontrolling interest increased by over TWD 1 billion as Delta Thailand more than doubled its earnings in the first half. Therefore, the net profit after tax in the first half was TWD 13.7 billion. So the EPS in the first half of this year was TWD 5.27 versus TWD 5.46 a year ago.
So here, we are going to have our Q&A session. So please just raise your questions, if there is any.
So can you talk about the seasonality for the first half? Will there be any gaps between different business units?
So I think as usual, the Q3 -- Q2 -- sorry, Q3 has always been the peak season of the year, and Q4 is more or less is slightly higher than the Q3 or lower than Q3 or remained flattish. So -- but for this year, I think there are actually still many uncertainties out there for Q3. So we actually have a pretty limited visibility for Q3 -- sorry, for Q4. But for Q3, we think is still doing okay. So for the second half, we think it's going to be better than the first half. In terms of each business segment, our power supply business will continue to grow, especially in some applications, for example, the server powers. But for other locations for example, the notebook powers, I think as you can see from the newspapers, the market itself -- the notebook market is relatively slow currently.
But for the industrial automation, because I think there are still some moving parts and uncertainties in the macroeconomic environment in China. So I would say -- we think there are still some uncertainties for the demand for -- especially for the China iron market. But we think that for the other part of the automation segment, which is our building automation business, I think we'll continue to grow pretty nicely in the second half. And our cooling fan business will also continue to grow. And as for our passive component business, I think in terms of the applications of this business is also highly diversified. There we are exposed to some smartphone market for our passive components business. But I think the other part of it, we still provide products -- our passive components to some other markets and applications. So for other parts of the passive components are actually doing okay.
So the company see any demand slowdown for notebook-related businesses? If not, what is the reason?
We still have a positive growth for our notebook power business in the first half, probably because we had less exposure to Chromebook. And that is actually the weaker part in the notebook market now. But in the long run, we think that we will be relatively conservative about the growth of the consumer-related products. But anyways, we think the demand is still going to be there, but just high or low, but we will be relatively conservative.
So can you give us the compensation breakdown of your inventory? Like how much is the raw material and how much is finished goods?
So about half of the company's inventory is raw materials and components and the other half is work in progress in finished goods. With the better component supply in the supply chain now as well as the coming of the big season, we expect inventory levels to go down gradually in the coming quarters.
So is the company still facing any chip shortages?
I think there are a few items still ensure supply. But overall, we don't see a serious chip shortage here.
So will you continue to increase your product prices further in the second half? What is the current cost environment of raw material?
I think we actually started to negotiate the cost sharing with our customers since last year, but just the negotiation in terms of the whole process or the whole cycle is actually pretty lengthy because from the time we started to discuss or negotiate new pricing with our customers to we see it takes effect. It actually is a pretty long time. But I think that for this year, we gradually see the contribution from this cost-sharing.
So does company expect GP margin and OP margin continue to improve in the second half?
I think there are still many variables for GP margin. So it's hard to say. But with better economic of scales, I think there is chance or it's actually likely, very likely that there is still some upside potential for our OP margin improvement.
So can you talk about the outlook for your EV business in the second half? Can we see the breakeven? Is it breakeven this year?
I think the EV business was somehow -- was somewhat limited by the supply chain disruption in the -- last year and also for the first half of this year too. But I think starting from the June of this year, we are going to -- we actually saw the acceleration of the revenue growth of this business. And then as for the breakeven, I think we are actually getting there, but I think it is actually not the short-term goal we are actively pursuing because I think the more important thing is this is actually -- this is for our long-term growth. So I think the safety issue, the quality issue, reliability issue is actually way more important than the short-term financials -- financial performance of this business. So I think with much better economies of scale, it's pretty natural to see the breakeven point in the future. So I think the more important thing right now is still to maintain our product qualities and reliabilities.
So what is the outlook for industrial automation?
I think China -- the China market still accounts for a big part, at least around half -- half of our industrial automation business. But given there are still many -- some macro turmoils in the China market. So it's very pretty hard to predict the growth or the outlook for this business in the coming quarters. But I think that except for the slow -- the weakness of China market, we still have products selling into other markets, for example, the European markets and American markets. So we expect those parts to contribute more to this business going forward.
Can you share the CapEx plans for this year and next year? Given the high uncertain macroeconomic environment, would you consider to reduce some capital spending for the next few years?
As mentioned in the previous analyst meetings, this year's CapEx is going to increase by teens compared to last year. For next year, it's likely to go down a little bit from this year's level. Our investment plans are all based on long-term strategies and will not be significantly adjusted or changed by the short-term economic fluctuations. And by nature, we are not a capital-intensive company. The main projects of our capital expenditures are still related to buying land, office buildings and factories. So the increase in actual production capacity is not equivalent to the increase in capital expenditure.
So for the part of capacity expansion, we will be very flexible since we made a lot -- many equipment by ourselves. So adding guidance for next year, considering the -- again, considering the high uncertainty of the macroeconomic environment in next year, we don't really have a very clear view yet. But roughly speaking, within the EV components, charging products, data center, server-related products, building automation and some infrastructure businesses should be able to maintain a relatively fast growth this year. As for the consumer electronics and computer-related products, we are relatively more conservative on them.
Do you think that the transition you have been taking -- undertaking over the past decade is the main reason why your performance is relatively resilient under this slow macro environment?
I think that -- our strategy has been determined to move -- continue to move forward to the solution and system business. So I think there is actually a big room for us to continue to grow in the solution and system business, but we still need to invest into those areas.
So can you talk about why the pandemic in China seems to have little impact on the company?
Well, I wouldn't say it doesn't have any impact on us because in April of this year, we were actually worried about the situation. So we actually even expected to see like the shipment being cut by half in the worst case. But fortunately, mean, those things didn't happen. And the orders were not structurally impacted by the pandemic in China. So we recover well. So it looks like okay now, but it was -- it was pretty -- it was pretty -- we were pretty worried about that in earlier this quarter, but we hope -- let's hope that for the second half, we will continue to deliver -- we can continue to deliver the pending order smoothly and see the acceleration of growth in the second half.
How much impact will China -- pandemic and the COVID control impact on your GP margin and OP margin? I think -- I'm sorry, how much did the COVID control in China impacted the gross margin and OP margin in Q2?
I think as you can see from the financial numbers, though at the beginning of this quarter, it was significantly impacted -- the shipment was significantly impacted by the COVID control in China. But fortunately, we recover -- we soon recovered from this impact. So it was okay, if you look at GP margin and OP margin in Q2. But as for the operating expenses, I think it's going to increase to some extend. One of the reason is because more and more business trips on the road and also more marketing events and also considering the wage inflation environment, and then we also want to be competitive in the hiring market, so that was the reason why we saw increase in the operating expense.
So the Chairman actually previously mentioned that you expected double-digit growth for this year. So considering the current macro environment, is there still the expectation?
Actually, we don't have any -- we don't make financial forecasts. So we cannot provide the clear estimates or guidance. But however, the company has an annual growth -- but considering that we have like about 14% year-on-year growth in the first half and also with the lower -- the low base of second half, I think double-digit growth is achievable for this year.
So can you talk about -- comment on the company's turnover time of inventory?
So in Q2 that we saw the number -- inventory number was about TWD 71 billion. If you use the Q2 revenue to do the calculations, it was about like 71 days. If you use the monthly revenue of June to do the calculation, it was around 65 days. But the higher inventory level in the first half was actually strategically prepared and considering the upcoming -- the coming peak season in the second half. So we think that -- I think the whole situation is going to be better in terms of the inventory level.
In terms of the M&A -- in terms of the mergers and acquisitions, will you have any change in this target, considering the current environment?
I think our M&A are all for growth -- part of the growth strategy of the company, but we don't buy the businesses to grow, but we grow the business we buy. So I think that as long as we believe that the target companies are beneficial to the long-term growth and the competitiveness of the company, we will do that.
So considering the sluggish China market -- China hiring market, do you think that the European market and the American market can drive the growth of industrial automation?
I think that we -- of course, we expect the hiring market continue to grow outside of China. But considering the China IA, we still have like around 50% from -- of our IA sales is from China. So we can still eliminate the impact of China macro environment.
Can you talk about your -- can you give me some update about your telecom power business?
I think that as previously is planned, I think the main reason or the main constraints for the fast growth of this telecom power business is still the lack of the key applications. But because we are actually very competitive in the market for this business, so we actually have a leading position in terms of the market shares. So we can still outperform the market.
So can you talk about your energy storage system business?
So I think the historic energy storage system is so new business for us. So it actually still contributes very little part, a tiny part of our revenues. But we are preparing for the long term. So I think going forward, we might see more sales contributions from this business, but it's actually right now, it's still pretty small.
So can you talk about -- or how do you see the growth -- the demand for your networking products this year?
I think the main problem of our networking business last year was related to the chip shortage of the chip makers, but since the last year -- the end of last year, we have been seeing the gradual improvements in terms of the chip supply. And also considering the low base, we actually had a pretty nice growth for this year. So in the first half, we had around like close to 30% growth for our networking products. And for the second half, I think we'll continue to see pretty nice growth for this business.
So then how is your EV solution business? Do you think the 30% to 40% growth rate is achievable for this year?
I think that, at least, if you look at the sales revenue of June, we actually have had close to 50% growth for these products. And then we might see some acceleration in July or even in the coming months, so I think that we're still positive on the growth of this business for this year.
So can you talk about the competitive landscape and sales contribution of your powertrain solutions of EV solution business?
I think that the main products of our EV -- sorry, the main products of our powertrain solutions are the motors and inverters, and we actually have many design wins from the international leading OEMs. And then we also sold pretty significant contribution from this business. Well, sorry, from this -- the motors and inverters. So we -- going forward, we believe with our technology and the cost advantages and our -- also as I said, we're piling many design wins in the pipeline, so we shall continue to see more sales contributions from this powertrain solution business.
So can you talk about your plan for the third generation of semiconductors? When would we start to see the sales contribution from it? And how should we think about the sales contribution of it?
So I think that we have been working on the development of the third-generation semiconductors. And then we also believe that it's going to play an important role in the future, especially when we see more and more heavier applications. So that is the reason why we have this business. And we also expect or we also hope this business continue to contribute more. But I think more important thing is we expect to get to know more about the technologies of it.
Can you talk about the progress in terms of your construction plans for the factories in different regions?
I think we have 4 factories in India now. And then one of them, we almost -- it's actually -- we started to produce -- stocked it to run almost nearly is full capacity. And then we will continue to work on other parts, other factories in India as well as our other production sites in other regions.
So how do you see the challenges in terms of recruit talents for the electric vehicle business? Did you do well this year?
Considering the higher penetration -- of the high penetration rate of EVs, I think it has been challenging in recent years in terms of recruiting talent. But fortunately, because we have a very big business segment, which is the power electronics segment, so -- and also, we have some co-working projects with top universities, so we are doing okay here, but we will continue to work on it in order to recruit more high-quality talents for -- not only for this business, but also for other businesses.
So is there still any impact from the COVID control in China? Do you see any changes recently?
I think there is pretty -- everything is going well and doing okay in our production base in China now.
I think according to Delta Thailand, they actually mentioned considering the geographic rates, you are going to have more and more production being shifted to Thailand. Can you confirm that?
I think that we actually have this plan to be more diversified not only for our business portfolio, but also for our production sites in order to reduce the volatility in many aspects. But we will and we are -- but we have and then we will -- we have the productions for -- the EV productions in both China and Thailand. And then we will continue to expand our capacity in the U.S. and Europe. So I think the bigger trend is we are not going to see a very highly concentrated production base in somewhere, but we will have a more diversified production base.
So the next question is how much do you see the consumer products as a percentage of sales of the company?
I think that it's actually a hard reason for me to answer because I don't really have an aggregate number of it. So maybe I can add to that. So because we actually categorize our businesses not by the applications by the product -- but by the product lines, so for each of the products or each of the business, we actually have pretty diversified applications and markets for them. So it's hard -- that's the reason why it's hard for us to provide such an aggregate number for you.
So how do you see the EV charging products? How do you see the demand and the outlook for this?
I think with increasing EV penetration in the market, we are definitely going to see more and more charging points and charging facilities in different regions. But for the China market, I think that for one thing, then -- the China market is highly competitive and then also it's highly price-sensitive. And also, maybe many of the local suppliers, they got some subsidy from the local government, so we have that less exposure to the China market for the EV charging facilities and products. But we actually have -- we are actually selling a lot into many other regions. And then I think that this business is definitely continuing to grow, considering the EV -- the increase in EV penetration in the market.
So can you talk about the demand for the servers? And is there any like component shortage for this business?
I think the demand for server power continue to be really strong. And also the shortage issue has been eased gradually.
Can you share like any growth target for your EV solution business?
I think as I mentioned, for this year, I think, like maybe at least 30% to 40% growth rate is likely to achieve both for next year because we haven't really compiled the annual budget yet. So I'm afraid I don't have any details for you.
Can you talk about like how much contribution is from -- on the GP margin is from the previously wrote-down inventories or from the cost sharing benefits with the customers?
I think there are actually many variables impacting the movements or the dynamics of the GP margin movement. So -- but we actually have a really consistent and very strict accounting policy for this. So we continue to write down the aging inventory according to that. But it's hard for us to give such number like how much can be attributed to the GP margin expansion.
So the next question is, can you give us any color on why the Delta Thailand has had such a very strong second quarter results? Was that related to the COVID control in China in the second half -- sorry, second quarter?
So I don't think that was related to the COVID control in China because in terms of the production -- to shift the production to other areas, for example, from China to Thailand, it can't be completed just within a quarter, it actually needs to take at least 1 year. So I don't believe that was because of that.
So the next question is related to the energy storage system business. So are you still seeing the significant or a severe battery shortage?
I think there is not only the supply in terms of the volume, the quantity of battery matters, but also the quality of batteries. Actually, even weigh more because I think the battery -- the quality of battery is highly related to the safety issue. So speaking of -- or when it comes to the battery procurement, we cannot only consider how many batteries in terms of the quantity we can get from the suppliers or from the market, but also we need to consider the qualities of the batteries we get from the suppliers.
So how do you see the demand and the outlook for your server powers as well as your data center solution business?
I think we continue to see pretty nice demand for these 2 businesses.
So what are the main -- the key growth drivers for the strong growth of Delta Thailand? Are they sustainable?
I think in terms of the production in Thailand, they actually have a big part of the production is related to the power supplies and also related to the cooling fans, especially the auto fans. And also they have a big part of it is related to the EV products. And as you may do recall that we also -- we actually shifted some of our networking products to Thailand from China during the outbreak of the trade war between U.S. and China. At the beginning, it wasn't really go well because we still needed to do a lot of tuning in terms of the qualities. But it's actually going well now. So we have answered all of the questions. And now also the time is up. So yes, thank you for coming. Take care and all the best. Thank you.