Delta Electronics Inc

TWSE:2308

Earnings Call Transcript 2018-Q3

[Ying Jun Hai, executive]

Hello, everyone. Welcome to Delta's Third Quarter 2018 Investor Conference. We will start right now. And as usual, we will have our IR Manager, Rodney, to report the financial numbers of Q3 to you.

[Rodney Liu, executive]

Hello, everyone. Thank you for coming. So before we start, I still need to remind you that all the financial numbers are reported based on IFRS, and the consolidated numbers have been reviewed by CPA as well. So right now, we will have a look at financial numbers of Q3.

Q3 was seasonally higher, up -- Q3 revenues was seasonally higher, up 10% Q-o-Q and 6% Y-o-Y. Sequentially, the growth of each segment was in line with seasonality. Thanks to the faster growth of passive components business, we have strong growth from Power Electronics, benign increase in Infrastructure, but slight decline in Automation. The drop in Automation was somewhat related to the quiet market in -- quiet IA market in China right now.

Year-on-year, we found some growth among all these 3 segments. Even with the slowdown in IA business since Q2, the Automation segment was -- as a whole, still remained the fastest-growing segment, while Infrastructure was also growing quite nicely with the contribution from telecom power business, data center solutions, EV chargers and wind power business.

Thanks to the battery utilization rate and some price increases, the gross profit was up 23% Q-o-Q and 10% Y-o-Y. Q3 gross -- GP margin was 27.9%, up from 25.1% in Q2 and 27.1% from a year ago.

Q3 R&D expenses as a percentage of sales increased slightly to 8% from 7.8% in Q2 and 7.5% from a year ago, where many of them weighed into our IA business. The 13% year-on-year increase was just in line with the previous quarter. So on the other hand, SG&A ratio decreased to 10.5% in Q3 from 11.2% in Q2.

Total OpEx in Q3 was TWD 11.9 billion, representing a 7% increase Q-o-Q and a 10% increase Y-o-Y. Percentage-wise, it declined seasonally to 18.6% in Q3 from 20.1% in Q1 and 19% in Q2. With the favorable growth of GP margin in Q3, the OP margin increased to 9.4% from 6.1% in Q2 and 9.1% from a year ago.

Here, we provide some breakdown of operating profit by sector for your reference. Year-on-year, we saw the biggest profit growth in Infrastructure and small decline in Automation.

Except the higher income from the foreign exchange -- foreign income, we had TWD 1.4 billion nonoperating profit, which was similar to the historical numbers. So in Q3, we had TWD 7.3 billion profit before tax, which was the second highest in history since 2015. It increased 70 -- 67% from Q2 and 6% year-on-year. So the pretax margin in Q3 was 11.6%, the same as a year ago.

Our EBITDA in Q3 was TWD 10.4 billion, which was up 40% Q-o-Q and 8% Y-o-Y. Q3 tax expense was about TWD 1.1 billion, representing a 15.3% effective tax rate. Meanwhile, the higher year-on-year controlling interest was related to the consolidation of VIVOTEK. So the net profit after tax in Q3 was TWD 6 billion, up 86% Q-o-Q and 11% Y-o-Y. So the EPS in Q3 was TWD 2.35.

So for the first 3 quarter, revenue was TWD 172.4 billion, up 6% from a year ago. The growth pattern of each business in year 3 quarter -- the third quarter was in line with that of the first half. Year-on-year, we still saw the strongest growth from Automation, which was mainly related to consolidation of VIVOTEK. Organically, Infrastructure was growing quite nicely, thanks to the EV chargers business, wind power, telecom power and data solutions businesses.

Year-on-year, the gross profit number increased by 3%, while the gross GP margin slightly declined to 26.3% from 27.2% a year ago, mainly because of the cost pressure in the first half. R&D expenses as a percentage of revenues also increased to 8% from 7.6% a year ago.

On the other hand, SG&A as a percentage of sales remained at 11.1% as at a year ago. The expense amount increased to 7% in the third quarter. So the total OpEx increased by 9%. Hence, the ratio increased to 19.2% from 18.6% a year ago. So the operating profit was TWD 12.2 billion, and operating margin declined to 7.1% from 8.6% from a year ago due to the softer margin early this year. So again, we provide the operating profit breakdown for your reference.

So year 2, the third quarter, we had about TWD 3,261 million nonoperating profit, which was quite similar to a year ago. So we had TWD 15.5 billion pretax profit, which was down 11% from a year ago. The EBITDA was relatively flattish, down 3% a year ago because some of the margin erosion was due to amortization charge -- charges -- charge.

Year 2, the third quarter, the tax expense was around TWD 3 billion, representing 19.2% effective tax rate. So the net profit after tax was TWD 12.1 billion, down 11% year-on-year. So the EPS was TWD 4.68 in year 2, the third quarter.

[Unknown Analyst]

So congratulations to the strong results in the third quarter. Here I have 2 questions. So for the first one, could you please give us more detail about the better -- I mean, the stronger gross GP margin?

[Ying Jun Hai, executive]

Okay. So for the stronger, better gross GP margin in the third quarter, I would say that -- which was mainly related to the price increases. But honestly, it's quite difficult for us to really quantify how much contribution coming from the price increases because we have too many product lines. So another reason is I would tend to say that, actually, the tight supply in components and the price increase -- the material price increase in components is also somewhat helpful to our business because Delta -- I mean, we, Delta, is a bigger buyer in the market. So we got better bargaining power compared to many of our peers. So we got better -- when we got better bargaining power, so we might be able to have more chances and opportunities to get the components from our suppliers, so -- which was also helpful for us. And another reason is partially because we have wrote down some inventories early this year. So in the last quarter, the costs of materials were becoming lower in the third quarter, which was also beneficial to the margin. So those are the 2 main reasons for better growth of GP margin.

[Unknown Analyst]

And my second question is, could you please give us some updates on the progress of acquiring Delta Thailand?

[Ying Jun Hai, executive]

We are still -- for the second question, we are still in the process of filing. Actually, we have done most of the filing process, but we are still dealing with the government bodies. So I'm afraid I don't really have too many details which I can provide because we are still waiting for their replies. Okay. So for your question, you were asking about margin -- or, sorry, the profit decline in Automation. Okay. So for the Automation business, actually, we have 2 subsegments under the Automation category, which is -- which are Industrial Automation and the other one is Building Automation. So for Industrial Automation, the first half was actually growing okay and growing quite nicely. But for the second half, I mean, yes, like you may -- everybody may know that the IA market in China currently was -- is quite slow because of the uncertainty of the macro environment. So the weaker margin in Automation was somewhat related to the slow market -- slow IA market -- slow demand in the IA market.

[Unknown Analyst]

So do you have any plans for the uncertain demand in Industrial Automation market?

[Ying Jun Hai, executive]

Okay. So personally, in terms of the Industrial Automation business, I would say that I still tend to believe that for the long run, I'm still quite positive about the outlook and the demand of Industrial Automation, even though with some uncertainties in the short run. Because the smart manufacturing is the trend of the future manufacturing, so it's just a time of matter. So I wouldn't worry too much about the IA business in the long term. So the only thing that I'm concerned is how we can better equip ourselves. So it's not just the trend in the China market, I believe it's also the trend even for the Southeast Asia market such as Vietnam.

[Unknown Analyst]

Sir, do you have any plans to diversify your risk from the manufacturing bases? I mean, I know that you just announced that you are going to acquire the shares of Delta Thailand in the last quarter, but do you have any other plans to just diversify the risk from this?

[Ying Jun Hai, executive]

Yes. We are doing some -- I mean, some other things, for example, that we have moved some of the production lines back to Taiwan. And we also announced our plans to build up another factories in the south -- southern part of Taiwan and also in the middle part of Taiwan, and also even beside this building. Just right next to this building, we just acquired another land, which is for our new offices and new production base. So we are also hiring some manufacturing bases from other companies. So we are doing something else, other from trying to acquire the shares from Delta Thailand. Okay. So for your questions regarding our electronic components for the auto market, I think the trend for the auto market is quite clear. If you look at our numbers, I mean, the revenue numbers from -- since last year, the -- actually, our revenue has been doubled in the auto-related business. But of course, there are always some pricing, I mean, pressures even in the auto market. If you look at the sales prices of the EV cars, actually, they are still quite, I mean, more expensive than the traditional cars. So -- but that is something that we have to deal with.

[Unknown Analyst]

If I assume that you are going to expand your capacity overseas next year, so how should I think of your CapEx for the next year?

[Ying Jun Hai, executive]

So for your question, essentially, Delta is -- I mean, the business model of Delta is not a capital-intensive business. So except for the testing equipments and the manufacturing devices -- manufacturing equipments for the auto-related market -- auto-related business, for those part of, I mean, equipments, actually, they are quite pricey. But compared to the semiconductor -- I mean, the peers in semiconductor, I wouldn't say that we are capital-intensive. So the CapEx for next year should not be too high compared to the historical numbers. Okay. So for your questions regarding to the inventories, I will have our CFO to answer this question.

[Judy Wang, executive]

So I couldn't really, I mean, forecast the -- how should we think of the inventory in the Q4. But I would say that because for the first half of this year, because there were some supply shortage in the components, so that's why we try to keep more inventories in-house. So that's why that when we are -- I mean, we were able to wrote -- write down some inventories early this year that we saw better resales -- saw better margins in the third quarter. So for your second question regarding the foreign exchange. So actually, I mean, our policy for the foreign exchange is always based on the natural hedge basis. So -- which means that we pay mainly in U.S. dollars and we also receive in U.S. dollars. So if you look at our foreign exchange incomes that -- which is actually quite stable, so that is the reason. But for certain areas, for example, if we have some projects in South Africa that we will see the -- how big the project size is, then we will prepare for the foreign exchange just for that project. Otherwise, we -- our policy has always remained, I mean, in a natural hedge, in U.S. dollars. Okay. So for the third -- I mean, for your third -- the third question regarding our debt, actually, it depends on the -- just as I mentioned -- just as I answered earlier, it depends on how much cash we need for a certain project in a certain area. For example, if we need some cash in Korea or we need some cash in South Africa that we need to borrow the money from the bank. But otherwise, I mean, for the U.S. dollars, because we receive mainly in U.S. dollars, so actually, we don't really need to borrow U.S. dollars. But we do need some -- we do need to borrow some money -- some NT dollars because we still need to pay like, for example, we need to pay the bonuses for -- to the employees in NT dollars, and also we need to pay the dividends to our shareholders in NT dollars. So sometimes, we do need to borrow some money -- borrow some NT dollars. Okay. So I wouldn't really worry too much about the increase of U.S. dollar interest rate because if you look at the target of -- which we are -- I mean, our acquisition target, which is Delta Thailand, it is also a company with a lot of U.S. dollars cash. So I wouldn't really worry about this.

[Unknown Analyst]

So how should we think of the numbers, I mean, the revenues, the outlook for the fourth quarter?

[Judy Wang, executive]

I didn't really, I mean, give any guidance for the fourth quarter.

[Unknown Analyst]

Okay. So then, how should we think of the outlook -- demand outlook of each segment in the fourth quarter? And also, if it's possible, could you please also share the -- any idea regarding the first quarter into next year?

[Ying Jun Hai, executive]

Okay. So for the fourth quarter, currently, if you look at, I mean, our forecast, I would say that we expect -- which is quite similar to the third quarter or even slightly up. But I have -- I still have to remind you that there are still so many uncertainties in the macro environment, so we couldn't really guarantee that we can really deliver this. But currently, it's still looking okay. But for next year, of course, if, I mean, the trade war goes on, that there will definitely be some impact on the end market, which is something really beyond our control. Okay. So for your question regarding our data center and telecom business opportunities. Okay. So for the data center market, actually, we have some products and solutions for that market because when you -- I mean, it's not just those big data center guys are building data centers. There are so many private companies. They are building their data -- small data centers and private clouds as well. So for that market, actually, we have the powers for servers. We have UPS. And also, for the telecom market, we have some telecom powers. And we also have a big client in the U.S. and we provide some solutions for their base stations.

[Unknown Analyst]

Sir, could you give us -- I mean, share some idea regarding the 5G opportunities?

[Ying Jun Hai, executive]

I think that everyone, I mean, has really high expectations for the 5G. Okay. So for the 5G opportunities, I wouldn't really expect -- I mean, it's just coming next year. But in the long run, I will say that, for example, if you look at the autonomous driving that you really need that communication highway if you want -- really need -- you really want -- you really -- that you can really see that there's self-driving cars on the road. So there are some opportunities for the ramp-up. I wouldn't say that it's just coming right around the corner. Okay. So for our opportunities in the auto market, actually, right now, we already have some products and solutions for the auto market. For example, we have the thresher motors and thresher inverters. We have DC/DC converters. But the trend -- I mean, I believe the trend for this market going forward is to integrate all these components and all these solutions together. But we are still on the way to really do this -- really achieve this.

[Unknown Analyst]

So how should we think of the gross -- I mean, GP margin of the fourth quarter? Because you mentioned that, actually, you -- to some extent, you benefit from the components shortage, which enabled you to increase the prices. So because -- so for the fourth quarter, is there any possibility that you will lower down your price?

[Ying Jun Hai, executive]

No. Actually, it's not that easy no matter for increased the prices or to lower the prices because it's the B2B business model. So it's not that easy to just, okay, I say that I will just go into lower down or increase the prices immediately.

[Unknown Analyst]

Okay. So how should we think of the tax rate -- I mean, the tax rate for this year and the next quarter?

[Judy Wang, executive]

Okay. So actually, as I always mention that because we have so many overseas subsidiaries, so it's really hard to predict the tax rate. But I think that normally, our tax rate is between 20% to 25% for the whole year.

[Unknown Analyst]

So my question is, how should we think of the demand outlook of Industrial Automation business?

[Ying Jun Hai, executive]

I think that Industrial Automation will definitely be one of the most important growth driver for Delta business. Globally, the -- actually, the market size of Industrial Automation is actually very, very huge. It's around USD 200 billion market size. So we only -- we are only a tiny player in the market -- I mean, the global market. So I believe there are actually a lot of room for us to growth (sic) [ grow ] in the Industrial Automation market. Of course, there might be some slowdown in the Chinese -- I mean, in the China end market for the short term. But in the long run, it's still something that has to be done in order to really achieve smart manufacturing. So as I said, I believe it is just a matter of time.

[Unknown Analyst]

Sir, can you give us some updates on your labor-reduction plan?

[Ying Jun Hai, executive]

Okay. So for this question, I will have our CEO to answer this question.

[Ping Cheng, executive]

Okay. So our original plan is we wanted to achieve that, like, 90% labor reduction by the end of 2020. But currently that I think that this project will delay for 1 year. But still, I mean, the labor reduction -- the declining rate of labor reduction is -- remains at 20% annually. Okay. So for your question regarding the -- I mean, the demand for data center solution business, okay, so if you look at the trend of social media, actually, more -- you'll see more and more Instagram, which means that people are uploading more and more pictures, photos, videos to the cloud. So we still believe that they're -- I mean, people are still quite hungry for the -- for bandwidth and data traffic. So I think the trend will be -- go on. So the demand will still be there. Okay. So I think that fast chargers for EV cars is definitely the trend, especially for the parking lots, the shopping malls and the charging stations. So nobody can, I mean, really tolerate to wait forever to charge a car. So the fast charger -- I mean, the superchargers are definitely the trend. Okay. So actually, currently, we are in the progress of developing 400-kilowatt superchargers. So what is the idea for 400-kilowatt? I can give you a benchmark number. For example, Tesla also has a so-called supercharger, which is 150-kilowatt currently. So it's just more than double. But of course, I mean, the currencies -- the current, sorry, not currency. The currents and the voltage are much, much higher in this 400-kilowatt superchargers. But once, I mean, these products or these fast chargers are done that you can only charge like for 10 minutes, and the car can run for 200 kilometers. And I think that it is quite reasonable if we want to see more and more electronic vehicles on the road. So I think that is something that people can really -- people would be really happy with this.

[Unknown Analyst]

So for this charging -- I mean, fast-charging projects, are you mainly doing this business with the Chinese market or with the European or U.S. market?

[Ying Jun Hai, executive]

Mainly with the European and American markets.

[Unknown Analyst]

Okay. So for the labor-reduction plan -- project, how should we think of the gross margin? Because when you -- when you are buying more and more automation equipments, the more you buy, the more depreciation you need to do.

[Ping Cheng, executive]

Okay. So for the automation equipments, I mean, the cost for automation equipments is actually quite similar to the labor cost. So if one -- I mean, if automation devices or automation equipment, the depreciation cycle of this equipment is more than 2 years. So we are not going to invest in that. So all of our automation equipments, the depreciation cycle, depreciation period of them are less than 2 years. And the life cycle for those automation equipments is between 3 to 5 years. So I -- we don't expect there would be too much impact on our gross -- GP margin.

[Ying Jun Hai, executive]

Okay. So if you don't have any other questions, thank you for your coming today. Thank you.