Delta Electronics Inc

TWSE:2308

Earnings Call Analysis

Company Shows Solid Q2 Growth, Foresees Challenges Ahead

The company reported Q2 revenue of TWD 103.4 billion, a 3% year-on-year growth. Gross profit surged 20% year-on-year, driven by a favorable product mix, improving margins to 34.1%. Operating profit jumped 28% year-on-year, with an OP margin of 12.7%. The first half saw a slight revenue increase to TWD 194.7 billion and a 13% rise in gross profit. Despite challenges in Automation and Infrastructure, the company remains optimistic about new product introductions and expects the second half of the year to be better than the first. OpEx is projected to grow by 15%, and the tax rate is stable at 20% .

Revenue Growth Amid Market Pressures

In the second quarter, the company reported a revenue of TWD 103.4 billion, marking a 3% year-on-year growth and a 13% increase from the previous quarter. This growth is notable given the overall market uncertainties and a decelerating global economy. Particularly, the U.S. GDP has slowed down significantly, and the European market is also expected to show minimal growth. Despite these challenges, the company's segments such as Mobility and Automation showed improvements both sequentially and year-over-year .

Operational Efficiency and Profit Margins

The company's gross profit in Q2 reached TWD 34.1 billion, up 20% from a year ago and 31% from the previous quarter, driven by a favorable product mix. Operating expenses increased by 16% year-on-year, driven mainly by higher R&D expenses and geographic expansion. Despite the higher expenses, operating profit surged 28% year-on-year and 78% quarter-on-quarter, improving the operating profit margin to 12.7% from 8.1% in Q1. This indicates that the company is becoming more efficient in managing its costs and generating higher profitability from its operations .

Solid Financial Performance

Second-quarter profit before tax was TWD 15 billion, up 26% year-on-year and 72% quarter-on-quarter. After accounting for a tax expense of TWD 3.1 billion, the net profit was TWD 9.9 billion, representing a significant 22% increase from the previous year. Earnings per share (EPS) for Q2 stood at TWD 3.83. For the first half of the year, the company's cumulative revenue reached TWD 194.7 billion with an EPS of TWD 6.05, reflecting a 4% year-on-year increase .

Market Outlook and Strategic Guidance

Looking ahead, the company maintains a cautious outlook due to global economic uncertainties. While acknowledging the challenges in the electric vehicle market, the leadership remains optimistic about new product introductions and the gradual improvement of the market. The company noted that despite the deceleration in market growth, opportunities exist in sectors like AI components, which carry higher profit margins. They also expect margin improvements through inventory reversals and the potential contributions from liquid cooling products expected to start shipping in Q3 .

Long-term Investment and OpEx Management

The company expects operational expenses to grow by about 15% year-on-year, in line with its long-term investment strategy. This includes sustained R&D efforts and expansions to capture future opportunities, without being swayed by short-term revenue fluctuations. The effective tax rate is stable around 20%, consistent across various geographies, providing a predictable financial framework for the company .

Leadership Transition

The earnings call also featured a farewell message from the retiring Chairman, Yancey, who emphasized the importance of transparency and thanked stakeholders for their support over the past two decades. Yancey highlighted the robust background of the new leadership and expressed confidence in their ability to steer the company towards sustained success .

Earnings Call Transcript 2024-Q2

[Unknown Executive]

Hello, everyone. Before the official start of today's meeting, I would like to do some very brief self introduction of myself. So my name is [ Lambert ]. I am in charge of the company's investment activities, including the IR program. So since Yancey has retired from the position of Chairman, so I will help moderate the meetings from now on.

So I'm going to report the financial numbers of Q2. As usual, all the financial numbers are reported based on IFRS, and the consolidated numbers have been reviewed by CPA.

Q2 revenue was TWD 103.4 billion, representing a 3% year-on-year growth and a 13% seasonal increase. As for the gross profit, thanks to favorable product mix, our gross profit in Q2 improved by 20% year-on-year and 31% quarter-on-quarter. GP margin in Q2 reached 34.1% from 29.2% a year ago and 29.5% in Q1.

Q2 OpEx increased by 16% year-on-year and 13% quarter-on-quarter. The intense competition for engineers and geographic diversification of R&D footprint have led to the R&D expenses continuing to outgrow our revenues. Despite an increase in OpEx, thanks to the gross profit expansion, operating profit in Q2 improved by 28% year-on-year and 78% quarter-on-quarter, while the OP margin was 12.7% compared to 8.1% in Q1 and 10.2% a year ago.

In terms of the segmentation performance, all segments showed different levels of sequential increase in Q2, while Automation and Infrastructure still experienced declines from last year's high base. Earning-wise, all segments in Q2 showed substantial sequential improvement with the strong earnings recovery of Automation and Infrastructure, mainly due to the low base in Q1. On a year-on-year basis, Mobility and Automation saw some profit contractions due to the soft underlying demand.

Q2 non-operating profit was TWD 1.9 billion, increased from TWD 1.4 billion in Q1 and TWD 1.6 billion a year ago. The rise in interest income was mainly due to the growth of cash balance.

In Q2, we had TWD 15 billion profit before tax, up 26% year-on-year and 72% quarter-on-quarter. Q2 EBITDA was TWD 21.7 billion, up 24% year-on-year and 45% quarter-on-quarter.

Q2 tax expense was about TWD 3.1 billion, representing a 20.5% effective tax rate. Net profit after tax was about TWD 9.9 billion, up 22% year-on-year and 73% from Q1. Q2 EPS, therefore, was TWD 3.83.

Now we have a look at the accumulated numbers of the first half. The first half revenue was TWD 194.7 billion, up 1% from a year ago. Gross profit was up 13% year-on-year with GP margin improving to 32.0% from 28.4% a year ago.

The OpEx in first half was up 15% year-on-year, which was in line with our budget planning. With the increase in the GP margin, the OP margin improved -- also improved to 10.5% from 9.7%.

As for segmentation performance, we saw revenue growth in Power Electronics and Mobility, while Automation and Infrastructure continued to suffer from lackluster demand from last year's high base. Profit-wise, we saw earning expansions from Power Electronics and Mobility, but still experienced some profit contractions in Automation and Infrastructure.

Non-OP was TWD 3.3 billion, similar to a year ago. In first half, we had TWD 23.8 billion pretax income. And EBITDA was TWD 36.6 billion, up 12% from a year ago.

The first half tax expense was around TWD 4.9 billion, representing a 20.5% effective rate. Net profit after tax was TWD 15.7 billion versus TWD 15.1 billion a year ago. So the EPS in the first half was TWD 6.05, up 4% from a year ago.

So now we are open to questions.

[Unknown Analyst]

The first question is related to the first -- the second half -- the outlook of our second half. I understand there are many uncertainties in the market. But can you just give us some colors -- can you give us some colors on the second half outlook?

[Unknown Executive]

So for the first question, to be honest, we are -- I mean, it's pretty hard for us to really predict the economy. So if you -- but if you look at GDP of the U.S. market -- I mean, of the U.S., especially if you look at the second half of last year, it was still over 4% in terms of the GDP. But if you look at the Q1 of this year, it was already less than 2%. So -- and it might not really be an official recession. But still, I think it's kind of indicating the deceleration of the market. And then if you look at the European market, I think the whole EU in terms of the full year growth prediction is going to be probably less than 1%. And then for the emerging markets, including China and India, I think the current prediction is around maybe 4% for the whole year. But the 4%, I don't think it's considered to be a very decent number -- decent growth for the China market. And so, generally speaking, if you look at those -- all those markets, I think it's kind of indicating the benign growth of the global market. I think that would be the very brief and maybe very initial idea for the outlook for the economy.

So for the electric vehicle market, I think even though there are some noises in the market, but I think it's [ not ] going to return to the old time. So -- but just for the whole industrial transitions, the transitions do take time. So there are always going to -- there are always some ups and downs along this journey. So even though if you look at the #1 OEM in the market, their shipment has been declining from the last year. But our major customers are actually the traditional OEMs. So even though I think the growth rate might be decelerated a bit by far, but still, we are going to -- they are going to have some new model or new products introduction. So we do believe there is a chance for us to at least not fall behind the market growth. Or if we get lucky, I think there is a chance for us that maybe we can still beat the market growth because of the new product introductions of our major customers.

So for your question regarding the reversal of our inventory, in Q2, we had around TWD 6.7 billion reversal. Except for the mobility segment, basically, we had the reversals for all other 3 sentiments. So the inventory reversal is actually based on our consistent accounting practices. So during the pandemic, due to a significant increase in inventory and the aging of stock, we accordingly recognized substantial provisions of inventory write-down losses. So starting from the Q2, we have seen the effects of inventory reduction.

[Unknown Analyst]

So for the inventory, can we expect more inventory reversals for the rest of the quarters of this year? So if that is the case, can we expect some further margin -- gross profit margin improvement in the next couple of quarters?

[Unknown Executive]

It really depends because it really depends on the actual shipment of our products. So I can hardly provide any forecast for you because whenever the components or materials of our certain products are being used, that there might be a reversal on the financials on the P&L. But we can hardly predict the growth or the shipment of each product line. So that's the reason I can hardly provide a very detailed forecast for you in terms of the inventory reversals.

In terms of the -- your questions regarding the AI servers outlook, I think as everybody knows, the AI servers -- the major buyers of the AI servers are actually the hyperscalers. So if you look at their CapEx planning for the next 2 and 3 years, I think there is no evident reduction in terms of their spending or the build-out of the new data centers. So even if the economy -- even if there are some hiccups in the economy, I do expect a relatively steady shipment of our AI server power business because -- given the circumstances.

So in terms of the liquid cooling sales contribution to the company, I think the liquid cooling, the actual shipment, the last shipment of the liquid cooling products will only start from Q3 of this year. So in terms of the shipment, I think there are still many uncertainties because we don't know the adoption rates, the real adoption rates from the clients for those new products. So it's pretty hard to say the sales contribution of our liquid cooling products for the next year.

[Unknown Analyst]

I have a follow-up question regarding the growth outlook for your Mobility business this year. So in the previous Analyst Meeting, you actually mentioned you expect the Mobility segment to grow maybe around 20-some-percent this year. But it seems there are some adjustments in terms of the growth expectations for the Mobility this year, right?

[Unknown Executive]

Yes. That's correct. I think that market is very dynamic. The 20% growth rate we previously gave was based on the budget planning of last year. But if you look at the inventory digestion in our warehouses, I do observe some slowdown in terms of the speed our clients who [ pull out ] our merchandise. But even with this deceleration of the electric vehicle market, we still observe very decent growth of our passive components for the automotive obligation because the passive components are not purely for the electric vehicles, but also for the traditional internal combustion cars. So we have been seeing nice growth for passive components -- the automotive passive components.

[Unknown Analyst]

My next question is regarding your competitive advantages in the liquid cooling market.

[Unknown Executive]

I think in terms of the liquid cooling solutions, there are actually 2 different levels, for example, including the rack-level cooling and building-level cooling. I think traditionally, we have been focusing more on the rack-level cooling, including air cooling and liquid cooling. I think Vertiv, the competitor or the peer you mentioned, they actually has done a lot and focused a lot on the building-level cooling. For the new AI data centers, I think it's very, very, very giant. It can be as large as like 10 football fields. I think none of the players in the market can serve all -- can provide all the components to those kinds of AI data centers. So I do believe it actually requires the collective participation by many different players in the market.

Speaking of the fast growth of the AI investments, I think not just -- I think our focus is not just on the cooling side, but also on the power consumption side. So if you look at the carbon footprint or the carbon emissions of many hyperscalers, actually, they have been increasing in the recent 2 years. Because even though they are trying to adopt some renewable energy for their data centers but the renewable energy can't actually provide baseload. So, many of the data centers, while they are actually building some renewable energy -- while they are adopting some renewable energy resources, but in the meanwhile, some of them, they are actually also building up new power plants and all those new power plants are actually the gas turbine power plants. So I think they are going to -- in this case or in this scenario, I think there are going to be a lot of, maybe, adjustment in the, maybe, data center architectures to mitigate the impact to the climate. So that would be my opinion for the liquid cooling or the whole power architecture in the data centers.

[Unknown Analyst]

So my next question is related to the -- Delta Thailand has announced its financial report a few days ago and separated out Mobility segment. Are there any differences in how the 2 companies define their 4 major segments? If not, it can be observed that Delta Thailand's revenue from Mobility is very close to yours. Are electric vehicle-related components primarily planned to be produced in Thailand in the future?

[Unknown Executive]

I think there is not much difference in the classification principles between us and Delta Thailand. Currently, I think most electric vehicle components are indeed produced in Thailand. But as several new batteries are completed and in production -- as several new batteries are going to be completed and put into production, I think this concentration will lessen in the future.

[Unknown Analyst]

So the next question is related to the -- any chance of demand improvement for networking -- your networking business, telecom power business and your [ EIS feature ]?

[Unknown Executive]

So I think these sectors have indeed been relatively sluggish recently. Telecom power business is struggling because 5G applications are still immature, leading to low usage willingness and thus reluctance from operators to further invest in expanding base stations. And for the networking business, I think it's mainly due to the very weak enterprise demand. So it has some negative impact on our networking business. But in the future, I think the networking products or the telecom powers might be benefiting from the AI investments because if you look at all those AI models, they are mostly on the clouds. So in the future, you are going to maybe expand the bandwidth. So in that case, we do believe, there are some opportunities for the upgrades -- in terms of the upgrades or new deployments of networking products and telecom powers.

[Unknown Analyst]

And the next question is regarding how do you see the outlook or the seasonality of this year? Is Q4 demand is going to be -- if the outlook of Q4 is going to be better than Q3?

[Unknown Executive]

I think we don't really make financial forecast. But I do believe the second half is going to be much better than the first half, which is in line with our seasonality.

[Unknown Analyst]

So the next question is related to your guidance for this year's OpEx growth. So is the OpEx still expected to grow by 15% this year, given the good performance of GP margin? Is it implied that this fast growth rate might increase further?

[Unknown Executive]

I think our OpEx increase is basically based on our budget planning for the whole year. And those -- all of those investments are investing for the long term. So it's not actually going to be -- it's not going to fluctuate just because of the near term fluctuations of revenues.

[Unknown Analyst]

So and the next question is, will there be any changes in the estimated tax rate?

[Unknown Executive]

The effective tax rate is currently stable at around 20% because Delta has many subsidiaries and tax rates are -- and the tax rates are related to the tax laws and regulation changes in various countries. So it's difficult for us to make predictions.

[Unknown Analyst]

And the next question is how do you see the outlook of Q3? And what are the growth drivers?

[Unknown Executive]

I think we have already answered the similar questions before. Maybe just move on to the next question.

[Unknown Analyst]

And how do you see the economy in China? And is there any improvement in the IA market?

[Unknown Executive]

I think since the pandemic, we haven't really observed any evident signs of recovery -- economy recovery in China. But I think, as I said at the beginning of the meeting, I think that GDP growth in terms of the current prediction of the China GDP growth for this year is around 4%. So I think it's just a matter of time to see the recovery or pickup in the China economy, even relatively low base, currently.

[Unknown Analyst]

I think according to what you have been saying, can I say that you are relatively conservative about the macro economy in the second half of this year, just like many other Taiwanese companies?

[Unknown Executive]

I think -- well, personally, I think I would expect the second half of this year is going to be better than the same period of last year.

[Unknown Analyst]

So can we expect any further expansion of your gross profit for the rest of the year or for the remaining of the year?

[Unknown Executive]

I think it really depends on the product mix. But given the AI components are actually the products carrying higher gross profit margins and also, there might be some inventory reversals in the near term, so yes, we do expect some -- this product mix for the remaining of this year.

[Unknown Analyst]

So what is your view on the AI PC and AI smartphone markets?

[Unknown Executive]

So I think, overall, generally speaking, for those AI PCs and AI smartphones, they are all going to enhance the edge and AI capabilities. I think theoretically speaking, because we provide many different types of components for both AI PC and smartphones, so if there is indeed a robust demand for such edge and AI products, I think it's definitely going to benefit our business. But I am not sure, the real demand for such products. And I don't think at present, I have the answer for this.

[Unknown Analyst]

So the next question is regarding to the tax rate because there are actually many, many countries -- more and more countries, they started to adopt the minimum tax rate in their country. So is that going to have some impact on your production capacity allocation?

[Unknown Executive]

I don't think that is going to have any impact on our production capacity allocation because we are not planning our production allocation based on this.

[Unknown Analyst]

So the next question will be related to the profitability of your Mobility business. Given that you have guided down your -- the growth rate of your EV business, in that case, would you expect any loss in your Mobility -- of your Mobility business?

[Unknown Executive]

I think even in that -- even with a relatively moderate expectation for the EV business growth rate this year, I think still -- we are still going to have some maybe very minimal profit for the EV business. So I think it's not going to be in a loss for this EV business.

[Unknown Analyst]

So given that we are actually experiencing the downturn for the whole EV market, when do you see there might be a recovery in the whole EV market?

[Unknown Executive]

I think there -- as [ Lambert ] said, I think there are always going to be some ups and downs during the transitions of the industry. So last year, the penetration rate of the EV -- the EV penetration rate was around 15%. So even with the deceleration of the increase, I think the transition toward electric vehicle is not going to go back. But there are some challenges holding back the further increase in the penetration rate -- the EV penetration rate, I think the relatively higher cost of getting electric vehicles is one of the major reasons. So I think if you look at the electric vehicle, I think there are still some challenges in terms of, for example, the comprehensiveness of the charging facility and infrastructure.

But if the government is going to achieve like the zero emission target in the next couple of decades, electric vehicles are definitely one of the major contributors to this carbon emission reduction. Because for the EV -- for the electric vehicle, whether they are powered by the nuclear power or renewable energies, they are considered to be the green power. But for the internal combustion engine cars, they are essentially fossil-powered vehicles. So according to all those factors, if we are able to see or to help the completion of the whole power infrastructure, including the charging facilities and charging infrastructure, I think if the whole charging facility or network is complete, I think there will be an acceleration for the electric -- for EV again.

So here, we have our Former Chairman, Yancey, as VIP -- as a VIP to this meeting.

[Ying Jun Hai, executive]

So I came here today to say thank you to all of you. Some of you, we have been knowing each other for maybe more than 20 years. I still remember like maybe 20-some years ago, when we first started to host this analyst meeting. There were only maybe just 2 -- a couple of audience -- maybe just a couple of audience joining this meeting. But today, we have so many people with us to join this meeting. But no matter how many people are sitting here and listen to us, I have always had this principle we have to maintain and to improve the transparency of the company to the investors. So whether there are many or just very few audience listening to us, we have always to maintain the transparency to our investors, and that's my principle.

So today, I'm here to give you an official goodbye, and thank you all for all those years' support. So in the future, I'm very looking forward to my -- the new chapter of my life. I think 20 years ago, I actually bought a resort in Thailand. But for the past 20 years, I didn't even have time to pay at least once visit. So right now, after my retirement, finally, I have time to visit the resort I bought in Thailand.

So I actually watched the analyst meeting online before I came into the meeting room. As you can see, [ Lambert ] actually has a very strong background in electronics. So he is very familiar with the technology. And also [ Rodney ]; our CEO, Mr. Ping Cheng, they will also continue to provide insights on behalf of the company. So I think right now is the time for me to finally take some rest. So we want to give you very special thanks. Thank you all for all those support in the past decades. Thank you so much.

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