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Delta Electronics Inc
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Hello, everyone. Welcome to our Q3 2021st Investor Conference Call. So today, we will have our new CFO joining us with this call. We have Mr.Po Yu, and Mr. Po Yu is a very experience financial officer in the company. And it is as usual that we will have our IR Officer, Rodney to report to you the Q3 numbers. And then after that, we will have a Q&A session. So you may raise your questions through the platform. And there will be rather answered later in the Q&A session.
So as usual, all the financial numbers are reported based on IFRS, and the consolidated numbers have been reviewed by CPA. I will review the financial numbers of Q3. Q3 revenue was NT$79.6 billion, up 3% year-on-year and 1% quarter-on-quarter. Limited by the global supply chain disruption, Q3 revenue was slightly below seasonal.
Due to a combination of materials and components price increases and a high base from last year, so the gross profit was down 5% quarter-on-quarter and 9% year-on-year. GP margin in Q3 fell to 28.3% from 30.1% in Q2 and 31.9% a year ago.
In Q3, the R&D expense was down 1% Q-o-Q and up 4% Y-o-Y. Likewise, the SG&A expense was down 1% Q-o-Q and up 2% year-on-year. And therefore, the OpEx in Q3 was down 1% Q-o-Q and up 3% Y-o-Y. Visualized R&D expense as a percentage of sales slightly dropped to 8.6% in Q3 versus 8.8% in Q2 and 8.6% in a year ago. SG&A as a percentage of sales also slightly contracted to 9.9% in Q3 versus 10.1% in Q2 and 9.9% a year ago. So the Q3 OpEx shed to 18.5% versus 18.9% in Q2 and 18.5% a year ago.
Within favorable GP margin, OP margin in Q3 was 9.8% versus 11.1% in Q2 and 13.4% a year ago. So in terms of the performance by segment, limited by the global supply chain disruption, sequentially, we felt mild growth for Power Electronics and Infrastructure while seeing a seasonal decline in Automation. Year-on-year, we saw strong improvement for Automation and modest interest in our electronics while Infrastructure had a little negative growth due to the disadvantaged business environment pre-pandemic, Earning wise due to the components and materials cost inspection, year-on-year, we saw some profit contractions for each segment and seasonal earnings decline for Automation and Infrastructure in line with the mild interest in Power Electronics. So here again, we provide a breakdown -- a sales breakdown by settlements, for your information, so the nonoperating profit was around NT$509 million in Q3. The significant decline in orders was mainly related to the loss mainly the loss related to the flooding in Thailand.
So in Q3, we had NT$8.3 billion profit-before-tax, down 27% year-on-year and 18% quarter-on-quarter. EBITDA in Q3 was NT$12.7 billion, which was down 18% year-on-year and 12% quarter-on-quarter. [indiscernible] expense was about NT$1.7 billion, representing a stable 20% effective tax rate. The net profit after tax in Q3 was about NT$6.4 billion, down 15% Q-on-Q and 24% Y-o-Y. So the EPS in Q3 was NT$2.45.
So now we will have a look at the accumulated numbers of year-2 third quarter. So year-2 Q3 revenue was NT$230.9 billion, up 30% from a year ago. Again, due to the increased prices in a variety of components and materials, GP margin in year-2 Q3, slightly fell to 29.4% versus 30.8% a year ago with gross profit up 8%.
R&D expense as a percentage of sales fell to 8.8% from 9.1% a year ago, while the SG&A as a percentage of sales also dropped to 10.2% from 11.11%. So the OpEx ratio in year-2 Q3 fell to 19% from 20.1% a year ago. Due to the softer GP margin in Q3, OP margin in year-2 slightly contracted to 10.4% from 10.6% a year ago, with [ OP ] increasing by 11%. So year-on-year, we found a pretty fast revenue growth for Automation and Power Electronics, followed by a mild improvement in Infrastructure. So profit wise, except a little contraction for Infrastructure, we fund significant earnings expansion for Automation and some improvement for Power Electronics. So here again, we provide a sales contribution, I mean, the breakdown by segment for your reference. In the year-2 Q3, we had about NT$3.1 billion in operating profit. And in total, we had NT$27.2 billion pretax income up 11% from a year ago. Our EBITA in year-2 Q3 was NT$40.1 billion, which was up 10% from a year ago. And the tax expense in the year-2 3Q was around NT$5.5 billion, representing a 20.2% effective tax rate.
So the EPS in the first 3 quarters was NT$7.91, up 14% year-on-year.
Now we will answer the questions from the audience.
So the first question will be for the short run. I mean, in terms of the Q4 of this year, how do you see the the component shortage and cost inflation, also the power outage in China and increasing energy price? How do you see those impact on the short run operations of Delta?
I think those are the headwinds for us in the near term, especially for the the cost inflations and supply chain challenges. And as the supply chain challenges -- because in the short run, I believe that the cost will remain at a higher -- relatively higher level. So the question is we need to discuss and negotiate with our customers about the cost sharing.
Okay. I have some points to add on. So in terms of the supply chain shortage or the supply charge, I think there is not only the direct impact on us, but also, there are some -- I mean supply chain challenges on the consumer side.
So for example, that taking our EV Solutions business, for example, so for example, because those OEM clients, they also suffer from the components and material shortage. So that -- which actually limiting our capability of delivering our products. So in that case, we are not able to -- even though we have healthy order flows, but we are not able to really deliver the products to our customers. So in order to be more conservative, we will write down some of the values of those inventories. So that is also some of the reasons why we have higher cost, I mean in Q3.
And the second question will be related to the chips shortage, especially for the global OEMs. When do you -- I mean, it's fair to see it's easing? And what's the impact to Delta?
So the supply chain issues indeed has substantial impact on the vehicle assemblies. And therefore, some of the customers, they may push out the delivery of our products. It's very hard for us to forecast when the situation can be eased. So we can only do our best and do the things we can control.
So there are more -- some of the noises in the China market including the power outage, including the increasing comparison base and the deceleration of the market growth. Can you talk about like do you see any changes in terms of the IA outlook in China? And what's your thought about the outlook for next year?
I think in terms of the sector nature, we are not the really power heavy industry. So we are relatively better. And also, we have prepared the power generators, the digital power generators in each plant so we shall be fine in that sense.
Considering there are many headwinds in the China [ iron ] market at this moment. So we indeed see some -- we can show some deceleration of the whole market growth. But we think that the transformation -- I mean the transition of the manufacturers in China that is the trend of transition for the manufacturers in china remains -- still remain unchanged. So there are -- there might be some fluctuations in the near term. But for the long-term trend, I think still remain unchanged.
So the next question will be, so how do you see the the market demand for notebooks and servers? And how do you see the outlook for the past year?
I think in terms of the -- and then customer size, I think for those people, they may need some new notebooks, they already don't want. So -- but only in the Tandems channels, and they are still building some of the inventories. So in terms of the order flow is still looking healthy.
So will you still expect the third quarter will be the peak season of this year? And and if some of the orders being pushed to the Q4 because of the supply shortage so will we see a better performance in the Q4 compared to the Q3?
I think in terms of our order flow is still very healthy. But it's not only about -- I mean, the supply -- the component supply on our side. It's also about the component supplies material slide on our customer side. So for example, if they have some components or material shortage, they may still push out some of the deliveries of our products. So it's hard for us to forecast the material supplies of our customers.
So in terms of the cost sharing, interest management with your customers, so how you see progress? Will we see the cost sharing in the near term?
We continue -- we actually have been continually discussing and negotiating with our customers about the cost sharing. And there, for some of the customers, we have already successfully increased our prices and shared the cost with them. For many others, and we still need to discuss with the customers. And that is actually the nature of doing business because it's easier, much easier to cutting the price, so it takes longer term to increase the prices.
So how do you see the outlook for your EV chargers?
So this year -- I mean that last year, this business was impacted by the pandemic. And again, this year, this business was impacted by the shortages, especially on the global OEMs. So we had modest growth for this business.
But as you can see the EV, I mean the cars are being more and more popular. So the need of charger facility will definitely go up. And if you look at -- if you look at the infrastructure expansion plans by the U.S. government, and they are good they also plan to invest a lot into the EV charging facilities.
So even though that there might be some headwinds and macro headwinds, I mean, in the near term, because we already have a full series of products. And then we also have a -- We also supply our -- provide our products into the global markets. So I believe that this business is going to be one of our growth drivers in the longer run.
So.
Can you provide and give us some colors on your Energy Storage System business?
We have been already, I mean, working on the the energy storage systems for years. And then we have also installed a couple of systems, they are with, I mean, over 1 million watts.
And this is -- I mean, the energy storage system is also part of Infrastructure. And it's also subject to the powers -- I mean, the battery cell, the supply of battery cell. And I think that for the renewable energy, because the supply of renewable energy is unstable, so that is the main reason why the company or we will need this energy storage system. And another reason is because the power companies, the electricity -- I mean the company, they charge the users by different by different level of power units. For example, in the peak time, during the peak time, they charge you higher rate in terms of the power usage and in the other time, they charge you a lower rate in terms of the power usage. So that's the reason why we believe the companies, they will need energy storage systems especially when there are more and more focused on the renewable energy. In that case, the energy storage system will be a very important part of this whole infrastructure.
So we are pretty positive about the long-term outlook for this business. But currently, because there is actually some tightness in terms of the battery supplies. So it still takes some time to see the the meaningful growth of this business.
So how do you see the Telecom Power business? And how is the -- I mean, the progress of 5G rollout?
I think we have answered this question and explained it for many times. Even though many people have been talking about the 5G rollout, but main reason still remains on the lack of mature applications. So there are still very little breakthroughs in terms of the applications.
In terms of the 5G rollout last year, I mean, the whole environment was hurt by the pandemic. But this year, I think that we do see some improvement and recovery for the whole telecom power market, especially in the U.S. and Europe.
So any improvements in the loss of EVs this year, you could assess?
So how do you see the outlook for this business in this year and the next year?
I think the delivery of our EV solution business has been capped by the supply challenge as well. And as I just explained, it's not only on our side but also because the shortage -- I mean, the component shortage on our customer side. So the delivery of our products has been, I mean, delayed and pushed out. So, the whole supply chain, China is being gradually going forward. I believe that we will continue to resume the fast growth of this business.
Can you further break down your EV Solution business into different product segments?
We have -- in terms of the -- our products for the EV cars that we provide mainly two parts of systems. So one is the Power Management system and the other one is the traction motors and tractions inverter, which is the [ Powertrain solutions ]. And Besides for like solutions, like our Power Management Solution and [ Powertrain Solutions ] for the vehicles, we also supply some of the cooling fans and passive components to the Auto market as well. And in the longer future, when autonomous driving cars are being more and more popular, we may also integrate some of our network products because you need the communications onboard, of course. So that is also the opportunities for us.
So the last question is related to your [ Delta Thailand ] subsidiary. So we saw some profit contraction this year for [ Delta Thailand ]. And when will we see the recovery of your post -- GP margin?
I think we actually can recover from the flood and pandemic very quick in terms of our internal operations. But in terms of the GP margins recovery, I think that we still need to wait until the ease of the whole supply chain disruption, before we see a significant or meaningful improvement of the GP margin.
So can you talk about whether you still have like any ongoing projects, MMA projects.
So the MMA is the very important part of our long-term strategies to support our sustainable growth in the long run. So we actually have a dedicated team continuing to concentrate in the projects and looking for potential targets. So recently, we actually acquired a Canadian-based company called March Networks, which is a very experienced companies providing surveillance service as a system. So after integrating its operations with our Building Automation business. I believe that it's definitely going to improve our competitive advantages in our Building Automation solutions.
And the last question is there is a car renting company. They actually ordered 10,000 vehicles from Tesla. Are you going to benefit from this?
We actually don't comment on any specific clients.
So can you talk about your Renewable Energy businesses? And who are your competitors seen in this market?
So in terms of the Renewable Energy businesses, we provide the solar inverters and [ we ] powers to the customers. I believe that our products and solutions can contribute a lot to the future market because if you -- I mean, when there are more and more EV cars on the road, it's not going to work, I mean, with the current concentrated electricity networks. So I believe that, that is the future event.
So can you talk about the new factory, the [ phase 6 one ] factory in Chungli?
I think that because of the geographic tensions, some of the products, for example, the surveillance products of our Building Automation business. and the networking products, They will be produced and manufactured in Taiwan rather than produced in china.
So the next question will be the CapEx for this year.
I think because we are still building some new factories. So the CapEx for this year and the next year will be quite similar.
So do you have any plans, I mean adopting the third generation of semiconductors materials?
So for the third-generation semiconductor materials, I think there are a lot to talk about. We have been watching the trend of the third semiconductor materials for years.
And applications, I mean, for those third-generation semiconductors?
They will be used in a higher frequency applications and for the higher output applications. But the questions still remains in terms of the supply that is uncertain. So -- but we'll keep an eye on the development of this.
Because of the whole supply chain issue, will you expect to see your inventory go up in the next year?
I think it still really depends on the whole supply chain situation. So if the revenues can go up or can grow faster, then we will see in terms of the inventory stays or go down in that case.
And the next question will be related to your passive components business. How do you see this long-term growth?
So for our passive components, I mean, in the old days, we mainly -- I mean they mainly supplied into the either smartphone market and the mobile devices and notebook market as well. But in the future, we will supply more passive components to the Auto market. And for the Auto market, I mean, the nature is at the beginning, the most challenging part when doing business with the OEMs. So I think that we have pretty much already -- we have already pretty much got the qualifications from the customers. So I believe that our pasive components business can provide market growth.
So can you talk more about your opportunity in Smart Grid?
As I said, currently, the power supply, the electricity supply is still very central in the electricity companies. In the future, the trend will be changed, and they will need more and more pragmatic and managed supply and the smart grid in order to fulfill the needs. So we don't really have much exposure to the heavy applications for now, but we will continue to watch -- keep an eye on this market.
So can you talk about your customer base for your EV charger business?
So there in terms of customer base for already the chargers, there is actually a pretty wide range. So for example, the OEM which are the auto makers can be the customers, and the operators can be the customer as well. And the government is also one of the customers. And the end users are also a type of customers as well. So in terms of the customer types, it's actually pretty diversified.
So the next question is do you have any collaboration with Huawei or with their MIH platform?
We don't have any -- for the time being, we don't have any cooperation with their MIH system for now.
I think we have answered all of the questions we have in our hand. So if you don't have any other questions, I think we will just call it a day. So hopefully, we can see you in-person, if the pandemic situation is away. So thank you for joining us today.
Thank you.