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Edited Transcript of 2308.TW earnings conference call or presentation 1-Aug-19 7:00am GMT

Q2 2019 Delta Electronics Inc Earnings Presentation

Taipei Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Delta Electronics Inc earnings conference call or presentation Thursday, August 1, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ing-Jiunn Hai

Delta Electronics, Inc. - Chairman

* Rodney Liu

Delta Electronics, Inc. - IR Officer

* Shu Ling Wang

Delta Electronics Inc - CAO and Head of Finance Department

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Presentation

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [1]

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Hello, everyone, and welcome to our Delta second quarter results. So as usual, we will have our IR manager to report the financial numbers to you. But as everybody knows that we consolidated Delta Thailand since this April, so the financial numbers of second quarter will look quite different from the one of the first quarter. So in order to help everybody to understand better, so we will have our CFO to elaborate more on the DET numbers after our IR manager presents the first quarter results.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [2]

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So thank you. Thank you, everyone, for coming. Now we will review the financial numbers of second quarter, first.

So as our Chairman said, with the contribution of Delta Thailand, that you will see a significant increase in our second quarter results. So for the sales revenue with the contribution of Delta Thailand, our second quarter result was up 27% year-on-year and 36% quarter-on-quarter. So sequentially, we found strong growth in each segment, but the fast growth of Power Electronics and Infrastructure was largely related to the consolidation of Delta Thailand, while this growth of Automation was rather organic.

So if you look at the pie chart, the percentage of Power Electronics has increased from 44% to 49% because of the Astra contribution from Delta Thailand. Likewise, year-on-year, we also saw increase in each segment. The growth of Automation was mainly from the Building Automation, especially from the contribution of VIVOTEK rather than our IA business. The China IA market was relatively quiet due to the trade tension between U.S. and China.

With the Astra injection from Delta Thailand, gross profit in second quarter was TWD 19.8 billion, up 37% year-on-year and 39% quarter-on-quarter. So our gross margin in Q2 was up to 27.0% from 26.3% in Q1 and 25.1% in a year ago.

Our Q2 R&D expenses as a percentage of sales decreased to 8.3% from 8.7% in Q1 but increased from 7.8% in a year ago. Likewise, SG&A ratio decreased to 11.4% from 11.8% in Q1 but slightly increased from 11.2% in a year ago. The total OpEx in Q2 was TWD 14.4 billion, up 30% quarter-on-quarter and 31% year-on-year. The significant increase in OpEx not only has a lot to do with the consolidation of Delta Thailand but also with the amortization from the acquisition. So with the scale, the OpEx ratio was picking up from 20.5% to 19.7%.

As a result, our OP margin in Q2 increased to 7.3% from 5.8% in Q1 and 6.1% in a year ago. So year-on-year, we saw the profit improvement in both Power Electronics and Infrastructure. Again, the profit expansion of Power Electronics and Infrastructure has a lot to do with the Astra contribution from Delta Thailand, while the profit decline in Automation was mainly related to the weak IA demand.

The nonoperating profit was around TWD 7 billion in Q2. The significant surge of nonoperating profit was mainly because of the noncash disposal gains of our original holdings in Delta Thailand. Otherwise, the interest income and FX income were relatively stable compared to the previous quarters. So in Q2, we had TWD 12.5 billion profit before tax, up 215% quarter-on-quarter and 182% year-on-year. The pretax margin in Q2 was 17.0%.

So our EBITDA in Q2 was TWD 16.3 billion, which was up 121% year-on-year and 132% quarter-on-quarter. So Q2 tax expense was about TWD 2.4 billion, representing a 19.5% effective tax rate. The net profit after tax in Q2 was TWD 9.5 billion, up 199 -- 191% year-on-year and 183% quarter-on-quarter. So the EPS in Q2 was $3.67.

So right now, we come to the numbers of the first half. So the first half revenue was TWD 127 point billion (sic) [TWD 127.5 billion], up 17% from a year ago. Year-on-year, we also saw the most significant increase in Power Electronics, followed by Infrastructure and a little from Automation. Our gross margin in first half increased to 26.7% from 25.3% in a year ago.

R&D expenses increased by 23% to 8.5% in first half compared to a year ago. SG&A also increased by 18% compared to a year ago, but the ratio remains similar in first half '19. So the OpEx ratio in the first half increased to 20.0% from 19.5% in a year ago. The operating profit in the first half was TWD 8.5 billion, and OP margin increased to 6.7% from 5.8% in a year ago.

So again, we provide the operating profit breakdown for your reference. So in the first half, we had about TWD 7.9 billion in our operating profit, which was mainly because of the disposal gains of Delta Thailand. So in total, we had TWD 16.4 billion pretax income, which was double compared to a year ago.

Our EBITDA in first half was TWD 23.3 billion, which was up 66% from a year ago. One for -- in the first half, tax expenses was around TWD 2.9 billion, representing a 17.8% effective rate. So the net profit after tax in first half was up to TWD 12.9 billion from TWD 6.1 billion from a year ago. So the EPS in the first half '19 was $4.97.

So this is my presentation for our first quarter -- sorry, the second quarter and first half numbers. So right now, we will have our CFO to elaborate some numbers to you regarding our Delta Thailand -- regarding the contribution from Delta Thailand.

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [3]

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Our CEO and Chairman were really considerate because they were afraid that because there were some one-off incomes in this second quarter numbers. So in order to help you to understand better, they asked me to prepare this, another 2 pages for your reference.

So as everybody knows that we actually owned about 20.93% of Delta Thailand before we did this acquisition. So according to the IFRS, we had to dispose our original holdings. And we actually sold that original holdings to ourselves. And then we bought it again at a price of THB 71, which was a tender price we offered to the market. So according to this accounting rule that we had to dispose our original holdings, that's why you saw a $5.9 billion nonoperating gains in the second quarter, which was a one-off income and which was also purely noncash.

But I have to remind you, again, as I said, this one-off disposal gains was completely noncash. So I will suggest this gain should not be included in the dividend payout next year. So we will discuss this in a Board meeting because this is purely accounting stuff.

So this TWD 36.87 billion was the number we actually paid for this tender offer. So even though that if you look at the market value of our shareholdings in Delta Thailand on April 2, which was 5 -- 54-point -- which was at TWD 54.94 billion, but it doesn't mean that we actually paid that much for this tender offer because we actually hold some shareholdings before this transaction. So if you look at our financial statements that you will find out that there is a significant increase in our intangible assets in the second quarter. That's because there is some increase in our goodwill for this Delta Thailand transaction as well as our acquisition of an American company called Amerlux.

So for the amortization, we actually have to amortize the intangible assets around TWD 1.6 billion every year, but the impact on our EPS will only be around TWD 1 billion. And the reason is quite simple, because we don't own 100% of Delta Thailand. So there is still some noncontrolling interest out there. So that's why the impact on our EPS is only around TWD 1 billion.

So because I know that like there will be many people asking me about the numbers without Delta Thailand, so I prepared this page for your reference. So if you look at the right-hand side, those are the numbers with Delta Thailand and Amerlux. So in the middle part, these numbers are the numbers we assume if we didn't have the -- we didn't consolidate Delta Thailand and Amerlux.

So even without the contribution from Delta Thailand and Amerlux, our sales revenues still grew by 7% in the first half, and our gross margin -- sorry, our gross profit still grew by 15% in the first half. And our expenses continue to grow because we continue to invest into our R&D. And the nonoperating income here, which we assumed that we still -- which will assume that we still hadn't consolidate the numbers -- consolidated numbers of Delta Thailand. So in that case then, the nonoperating profit would be 19 -- sorry, would be TWD 1.9 billion in that case. So in that case then our EPS would be somewhere around TWD 3.17.

But I have to emphasize and remind you that this number -- these numbers are -- haven't been reviewed by CPA. So this is only for your reference.

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [4]

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So I see that our CFO has explained the impact, I mean, from the DET deal quite clearly. So now we will just -- so right now, if you have any questions, please just ask. Okay.

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Questions and Answers

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Unidentified Analyst, [1]

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Okay. So my first question is about -- is regarding the -- your gross margin because I think that your gross margin was actually better than the expectation. So I want to know then, what is the reason behind that?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [2]

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Okay. So in terms of the GP margin, I think there are some reasons for this, your so-called better-than-expectation GP margin. So for one thing that, I think, even the material pricing is relatively stable now compared to the last year. But the negotiation with the clients is still ongoing, even though that we actually increased the product pricing in the second half versus last year. And when the material price becomes more stable, the clients, usually, they will come back to us and renegotiate the product price. But I think that we are still holding up okay. And this kind of bargaining process is always ongoing. And also, I think the automation of our manufacturings also helps a little bit on our gross margin expansion. And the third reason is I think that our product mix also improved a little bit.

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Unidentified Analyst, [3]

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So I was wondering, what's your view on the EV market outlook?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [4]

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I think that everybody really has really high expectation for EV market outlook. But actually, the market -- or the demand is a little bit below the expectations right now. I think one of the important reason is actually those EV cars, I mean, compared to the traditional vehicles, are still relatively pricey. And also the scale, I mean, the amount of the vehicles is still quite small. And the third reason is the infrastructure, the EV infrastructure is still not that comprehensive to really support the booming of the EV cars.

I think this is a little bit like the chicken and egg problem. So if you want to have more EV cars, then you need to have more infrastructure and the system to support this at the beginning. But if you want to have more infrastructure, then you would need more EV cars on the road.

And it may not be the case in many other countries, say, like U.S. But actually, in Asia, the residential houses, many of them, they are -- those kind of what we call like apartments or flats. So how to share those expenses if you -- some of the residents in apartments, they own EV cars, but the others of them, they don't. So even, you have this infrastructure, there is still some other issues that you need to handle with. So even with so many -- so many problems, but I mean, in the long run, there is no doubt on the -- there is no doubt on the [chain] of EV cars. So I think the only problem is it still takes time to see the market really takes off.

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Unidentified Analyst, [5]

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So my question is regarding your Automation segment. As we see that the revenues of your Automation was actually growing but the profit of your Automation segment was actually declining. So I want to know, what are the reasons behind that?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [6]

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I think the main reason for the profit contraction is mainly due to the weak demand, the weak IA demand at the moment. And everybody knows the reason, which was because of the trade tension and the macro uncertainty between China and the U.S. But even though that you actually barely hear that the China government, they talk -- they are still talking about this 2025 project. But even though they didn't -- I mean, they don't talk about this that often right now, but there is still something that they have to do in order to be sustainable in the future.

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Unidentified Analyst, [7]

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So my question is regarding the 5G network. So how would you see the 5G outlook in the second half? And how do you see your opportunities in this market?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [8]

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Okay. So for 5G network, actually, everybody is talking about this. So the reason is obviously because it's obvious because this is the next big thing. So everybody has a really high expectation for 5G networks. Many people know that the 5G -- the advantage itself of applying this 5G network, implementing this 5G network is higher speed. But I think another advantage that people barely know is actually, when using this 5G network, the devices which this network -- so many people know that one of the biggest advantages of 5G network is the speed of 5G. It's much faster compared to the 4G network. But I think some of the advantage of 5G that people barely know is actually 5G -- adopting this 5G network actually can connect a lot more devices compared to the 5G (sic) [4G] network.

So if we -- when we look at our customers, our customers, they are mainly those top 100 carriers or operators in the world. And we will see that some of them, they are more aggressive because of the government policy, say, China or Korea. But some of them, they are relatively conservative or more cautious on their investment into these 5G networks because they want to know how can they justify their investment.

So I think that even though there are still some minor, I mean, issues that have to be tackled with, I mean, in terms of the technology, but the more critical thing is about the business model because the operators, they have to know that what is the our business model for them to making money from this investment. So if you talk about our opportunities in 5G cycle that we are still quite positive about this because our products for the 5G cycle is mainly the telecom power, which is the power supply for a 5G network. So the output of 5G will be higher compared to the 4G -- compared to the powers for 4G.

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Unidentified Analyst, [9]

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I saw that if we include Delta Thailand, that operating profit in the first half was TWD 8.5 billion. But if we exclude Delta Thailand, the operating profit was TWD 8.4 billion, which means that Delta Thailand, they only had TWD 100 million operating profit. I'm not sure whether it's correct. Or is that because of the amortization?

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [10]

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Yes, of course, because when you look at the numbers with Delta Thailand and Amerlux, which is the consolidated numbers, so of course, that is with the included -- that includes the amortization of this acquisition. So Delta Thailand, they not only had just only TWD 100 million. If you look at their financial statements, you can see that they have at least 6% OP margin.

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Unidentified Analyst, [11]

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My question will be followed by the previous question. So I know that the contribution from Delta Thailand is mainly on the Power Electronics and on your Infrastructure segment. But is it possible that you can give us some kind of breakdown that let me know their contribution, I mean, in terms of the operating profits in these 2 segments?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [12]

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Actually, Delta Thailand is a public listed company. So they have all this public information on their website. So I would recommend you to go to their website, and then you can see all this public information.

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Unidentified Analyst, [13]

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So as I know that the second -- in second quarter, Delta Thailand's gross GP margin was 19.9% and their OP margin was 4.7%. And a year ago, I mean, in 2018 year, their gross margin was 22.9% and their OP margin was 9%. So I was wondering, what is this -- what is the reason behind this shyer margin of Delta Thailand in the second quarter? So also there, I noticed that you have a -- you have a project with -- you have an ongoing project with Mitsubishi Heavy Industry. So could you please share us more -- I mean, give us more color on your thoughts and strategy on these kind of projects with the industrial company?

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [14]

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So for your question regarding Delta Thailand's more -- shyer margins in second quarter, I think one of the reason -- possible reason is because they are actually rebalancing their production lines and shifting the production lines. So there were some expenses and some costs because of that.

And besides, our Chairman just mentioned, Delta Thailand, they are actually shifting some production lines and rebalancing the production lines. So because -- according to the government, I mean, the Thailand government regulations, there was some minor change in their pension regulations, I mean, for the workers. So I think that there are some sort of like minor impacts. So that became like a 2%, 3% impact on the OP margin.

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Unidentified Company Representative, [15]

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So for your second question regarding our project with Mitsubishi Heavy Industry, as you may know that we actually built a production line from Mitsubishi Heavy Industry like a few years ago. The reason why we would like to acquire this production line and this technology is because we have our own renewable energy products. So given that we have this renewable energy business, in order to provide the solutions, there is no way that you only have this renewable energy, say, our solar inverters and our wind powers but you don't have the energy storage system. So that is the reason why we acquired this technology and this production line from Mitsubishi Heavy Industry.

So with this energy storage system, we started to be able to really provide the renewable energy system and solutions for our customers. So I think the challenge on this is not about either the renewable energy or the energy storage system but how to really come now to the grid. So that is the most difficult part because you need to like talk to and co-work with the utility company. So I think I would say that, that is a breakthrough for us when doing this.

Sorry, I forgot. Your second question was actually for our CFO, right?

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [16]

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So your question regarding amortization for the customer relationship and the part that we need to amortize that, we will amortize that part for 10 to 12 years.

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Unidentified Analyst, [17]

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So you just mentioned the energy storage system. I would like to know more detail about this energy storage system. So I wonder if you are, I mean, using your own batteries for this energy storage system.

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Unidentified Company Representative, [18]

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Yes, of course. Yes, of course, we would use our own batteries to develop this energy storage system. Otherwise, it doesn't make any sense. So the -- I mean, the technology of making these batteries is the one that we acquired from Mitsubishi Heavy Industry, like I just mentioned. I just talked about that.

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Unidentified Analyst, [19]

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So I wonder that why you are doing this. Is this something like the battery factory Tesla was doing in Australia?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [20]

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Sorry, regarding the battery factory in Australia, I'm not aware of that. I'm not clear about that. But our own solution is we just provide this energy storage system to become part of the solutions. And our eventual -- I mean, ultimate goal is to connect our products and solutions with the grid.

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Unidentified Analyst, [21]

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So my second question is besides the EV chargers, what are the other products or solutions you supply into the EV market?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [22]

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So besides the EV chargers, we have our own charger motors and charger inverters and also some power management solutions such as DC/DC converters and onboard chargers. So because -- I mean in this auto market or EV product, the product cycle is really long. And also, it takes a really long time, like a few years to get all the qualifications from the OEM. But we have already got -- we not only have many project wins at hand. We also passed through many qualifications. So that's why we already have some mass production for some of our products. So even with the Astra contribution from Delta Thailand, the total percentage, I mean, of total sales of the EV cars is still around like 5% or below 5%.

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Unidentified Analyst, [23]

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So I would still like to ask about the outlook for the second half. And also, as I know that Nidec, one of your competitors, they actually have their cooling system for the EV cars, so I wonder, do you also have some similar solutions or technology as they do?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [24]

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How am I supposed to answer this question? Simply put, actually, if you talk about this cooling system or cooling solutions, we do have our own cooling systems and the cooling technology. So we not only have our own cooling fans but also some other cooling technologies, say, vapor chambers and heat pipe. So as I actually mentioned like earlier that we also have our cooling products, say, vapor chamber for the gaming smartphones. So there are actually many, many different kinds of cooling solutions in the market.

So if you ask me about the outlook for the second half, I think the third quarter should be okay because of the seasonality. But the outlook for our Industrial Automation still remains uncertain. But the passive will continue to grow, and data center will grow, too. And also the 5G market is still subject to the investment, I mean, the CapEx investment from the operators, but our products are ready there. And also, our solutions and products for the EV market will continue to grow, too.

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Unidentified Analyst, [25]

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So my first question is for the CFO. So you just mentioned that the amortization for intangible asset is around TWD 1.6 billion for a year, which means that you will have like TWD 4 million impact on the OP margin -- on the operating profit. Is that correct?

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [26]

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Yes.

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Unidentified Analyst, [27]

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So my second question is about -- is regarding the Industrial Automation. So if you look at the number -- I mean, in terms of the sales revenue, the sequential growth of the Automation segment is looking okay. But it seems there is some heavier pressure on the margin -- on the profit. I wonder, what is the reason behind that?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [28]

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So that is normal that when the market is slow, so the price is always under pressure. I think that other than the macro factor, one of the reasons you see this margin -- sorry, the profit contraction is because we still continue to invest into the R&D. So one lesson we have learned from the financial crisis in 2008 was that we didn't lay off any employees during that time. Even during the down cycle, we still keep our employees and we still keep investing. So when the market is back, we are ready for that. But I think the good thing for Delta is we have a diversified and more balanced portfolio. So of course that we have so many businesses -- different businesses. Sometimes, some of them, they are under pressure. And sometimes some of them, they are doing good. So I think that overall, we are still doing quite okay.

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Unidentified Analyst, [29]

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So I wonder that because in second quarter, you used to have this one-off non-op income. So I wonder if in the third quarter, I mean in the next quarter, that you don't have this one-off income on your income statement but you still have this amortization for acquisitions. So would you have some pressure on your bottom line?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [30]

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Yes, of course, there will be some pressures. But both nonoperating disposal gains and amortization, they are actually more of the accounting -- more about accounting stuff.

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Unidentified Analyst, [31]

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So I wonder that in -- historically, that the third quarter, Q3, is usually the peak of the whole year and Q4 is slightly below Q3. So I wonder if it's still, I mean, the case for this year.

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [32]

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Maybe perhaps. I don't know the answer because there are still too many uncertainties out there, especially those macro swing factors that is totally out of our control. So the only thing that we can do is we do our business. And that is something I can only say.

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

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