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Edited Transcript of 2308.TW earnings conference call or presentation 31-Oct-19 7:00am GMT

Q3 2019 Delta Electronics Inc Earnings Presentation

Taipei Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Delta Electronics Inc earnings conference call or presentation Thursday, October 31, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rodney Liu

Delta Electronics, Inc. - IR Officer

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Presentation

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Unidentified Company Representative, [1]

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Okay. Hello, everyone. So welcome to Delta Q3 2019 Investor Conference.

As usual, we will have our IR Manager, Rodney, to report the financial numbers of Q3 to you.

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

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Okay. So thank you for coming. Before we start, I need to remind you that all the financial numbers are reported based on IFRS, and the consolidated numbers have been reviewed by CPA. So in order to make the information more clear to you. We have done a little bit adjustment on the way we present this time.

So with the macro weakness, sales revenue was down 1% Q-o-Q, but it was up 14% Y-o-Y to TWD 72.4 billion in Q3, thanks to the Delta Thailand consolidation. However, even with an unfavorable scale, gross profit was up 15% year-on-year and 3% quarter-on-quarter with GP margin up to 28.2% in Q3 from 27.0% in Q2 and 27.9% a year ago thanks to slightly better business mix and cost control.

Q3 R&D expenses as percentage of sales increased to 8.8% from 8.3% in Q2 and 8.2% a year ago. Meanwhile, SG&A as a percentage of sales also increased to 11.8% from 11.4% in Q2 and 10.5% a year ago. So the total OpEx in Q3 was up 3% Q-o-Q and 26% Y-o-Y. The significant year-on-year increase in OpEx was largely related to the consolidation of Delta Thailand as well as the amortization from the heavy season. With [a similar] scale, the OpEx ratio hit a new high at 20.6%.

However, even with the disadvantage of OpEx ratio, thanks to the GP margin expansion, OP margin in Q3 increased to 7.6% from 7.3% in Q2 but decreased from 8 -- sorry, 9.4% a year ago. So year-on-year, we have some nice growth in Infrastructure and significant growth in Power Electronics, which was largely related to the consolidation of Delta Thailand.

The growth of Automation was mainly from Building Automation, especially from the contribution of VIVOTEK rather than the IA business. Meanwhile, the year-on-year profit in consumer Power Electronics also had a lot to do with the Astra contribution from Delta Thailand.

So that provided a decent growth of passive components. Sequentially, we also found growth and profit expansion in Power Electronics, but the demand in Automation and Infrastructure still remains sluggish, which has put some pressure on the profitability.

So the nonoperating profit was around TWD 1 billion in Q3, which was within the normal range. In Q3, we had TWD 6.5 billion profit before tax, down 12% year-on-year and 48% quarter-on-quarter. We also provide the EBITDA (sic) [EBITA] number for your reference here. Our EBITDA (sic) EBITA in Q3 was TWD 10.4 billion, which was up 1% year-on-year, but down 36% Q-o-Q.

Q3 tax expenses was about TWD 1.2 billion, representing a 17.9% incentive tax rate. The net profit after tax in Q3 was TWD 5.1 billion, down 16% year-on-year and 46% quarter-on-quarter. So the EPS in Q3 was TWD 1.97. So now we have a look at the accumulated numbers of year to 3 quarter.

So the revenue was TWD 199.9 billion, up 16% from a year ago. Again, the past growth had a lot to do with the consolidation of Delta Thailand since Q2. The gross profit margin increased to 27.3% from 26.3% a year ago. Due to the consolidation of Delta Thailand, R&D expenses [increased 24%] to 8.6% as a percentage of sales. Likewise, SG&A also increased by 21% from 11.2% as a percentage of sales to 11.6%. So the OpEx ratio increased to 20.2% from 19.2% a year ago. Thanks to the higher GP margin, the OP margin remained the same at 7.1%, even with the higher OpEx ratio.

So year-on-year, we saw the most significant sales increase in Power Electronics followed by Infrastructure and a little from Automation. Again, the fast growth of Power Electronics and Infrastructure was largely related to the consolidation of Delta Thailand.

So in the first 3 quarters, we had about TWD 8.9 billion nonoperating profit, significantly higher than a year ago mainly because of the positive gains of DET in Q2. So in total, we had about TWD 22.9 billion pretax income. Our EBITDA (sic) EBITA was TWD 33.7 billion, which was up 38% from a year ago.

Tax expenses was around TWD 4 billion, representing a 17.8 effective -- I would say effective rate. So the net profit after tax was TWD 18 billion. So the EPS in the first 3 quarters was TWD 6.94.

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Questions and Answers

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Unidentified Analyst, [1]

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Okay. Here, I got 2 questions. So the first one, if we look at sales revenue of the third quarter, it seems that we haven't seen any significant or meaningful synergy from the consolidation of Delta Thailand. So this is my first question.

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Unidentified Company Representative, [2]

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Okay. So in terms of Delta Thailand debt, there are -- I mean 2 main reasons for the weakness of Delta Thailand business. So firstly, the -- we have the plan to relocate some of our production lines to Delta Thailand. But because of the uncertainty of the trade tension. And also, there were some hiccup during the transition period. So there was in this some hiccup in terms of this. And also, the end market, it's not that good at the current moment because the main business or the applications -- and the main applications for -- of Delta Thailand are power-related products and telecom-related products. So the end market, that -- those 2 end markets are not doing really well at this moment.

So we just went to Delta Thailand in about 2 weeks ago, so we have done some reviews on the current situation of Delta Thailand. I think for the -- I mean from the -- the good thing that Delta Thailand, I mean -- in Thailand, they actually don't have any labor shortages. So there is no difficulties in terms of hiring new laborers. So -- but of course, I mean labor cost there is not really, really cheap, but it's still manageable. So there is no such emergency to do the factory automation, just like we have to do -- the way we have to do in China. But we will keep improving the production in Delta -- we will keep improving the production in Delta Thailand. So -- but we just need some more time.

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Unidentified Analyst, [3]

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Sure. Okay. So in terms of the weakness of the telecom power business in the third quarter. Even though like many people are talking about the 5G opportunities, and they are very keen about this. But from our view, we haven't really seen any.

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Unidentified Company Representative, [4]

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Okay. So we haven't seen any significant or meaningful side of mass deployment at this moment. And also for -- another reason is because we have big customers for our telecom power business. And one of the orders from this customer have been delayed to the next year. So that was also one of the reasons for the weakness of our telecom power business in Q3.

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Unidentified Analyst, [5]

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Okay. So my question is related to the Automation business. I wonder that have you already seen any sign of a recovery of the Industrial Automation business or the market.

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Unidentified Company Representative, [6]

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So from our point of view that -- we think the Industrial Automation market has already -- has gradually bottom -- has been gradually bottoming out. So -- because if you look at China PMI that you can see that there is some early sign of recovery, or at least you can say that we believe this is the trough of the market.

Okay. So regarding the profitability of the Automation business. So because we keep investing into our Automation business. So we hired -- for example, that we hire many engineers. And we also keep investing into the new product lines. So when the top line is not growing as we expected, which is actually subscale. So that puts some pressure on the margins.

So -- but Industrial Automation is just part of our Automation segment. So we also have the other part, which we call it Building Automation. And for Building Automation there, we have a subsidiary called VIVOTEK. And VIVOTEK has been growing quite nicely this year. The main reason for that because VIVOTEK has benefited from the trade war because many U.S. companies and they are not going to -- they are not allowed to buy the components from the Chinese suppliers. So they -- so that's one of the main reasons why they have been growing quite nicely this year.

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Unidentified Analyst, [7]

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Okay. So my second question is related to the expenses control. So I can understand sometimes the macro environment or your top line growth is out of your control. But if the top line growth can -- like if you can grow the revenue side as much or as fast as you -- as bad debt, could you -- or would you consider to control your expenses more cautiously?

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Unidentified Company Representative, [8]

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Yes. I think I have answered these questions for many times. We actually reviewed our expenses on a monthly basis. So even for our fast -- fastest-growing business, let's say, the EV-related segment, in the past, that we didn't have ceiling for their R&D investment. But right now that we have a cap for debt. So we are actually controlling our expenses more cautiously.

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Unidentified Analyst, [9]

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So because we can see that the expenses in Q3 was actually higher. So was there any one-off expenses in your Q3? Or will we see that again in Q4?

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Unidentified Company Representative, [10]

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Okay. So if you look at the percentage -- I mean the percentage-wise that this expenses ratio -- OpEx ratio is slightly higher than the previous quarters, that was mainly -- I mean because of the top line growth wasn't growing, I mean, as we expected. So -- which was subscale. So that was mainly because of the economic scale. But in terms of absolute numbers of expenses, I think that is within a normal range.

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Unidentified Analyst, [11]

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Yes. Because Delta Thailand also announced -- released their results like a few days ago, and it was quite disappointing. So if you -- if we exclude the dilution from Delta Thailand that actually your Q3 numbers and Q3 results are quite nice. So is there any reason for that?

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Unidentified Company Representative, [12]

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Okay. So there are 2 main reasons. For -- one thing that we keep improving our product mix. That's one thing. And the second reason is our passive business was doing quite well in Q3 because one of our big customers, they were doing quite good in this quarter.

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Unidentified Analyst, [13]

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So -- okay. So my second question is related to the -- your IA business. Because if we look at the China market, actually, the servo motor was down. I mean in terms of the shipment, was down like double digits for this year. But you still -- your IA business still doing okay. So does that mean that you gain some share or you have some share gains from your competitors? So what is the reason? What is the reason you outperformed your competitors?

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Unidentified Company Representative, [14]

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So I wouldn't say that our Industrial Automation business is doing really well because as far as I know that our Industrial Automation business year-to-date is down like 2% or year-on-year. But compared to many of our competitors or compared to the macro environment, we are still doing okay. I think one of the reasons is because we keep developing new products, better products to the markets with reasonable prices.

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Unidentified Analyst, [15]

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Okay. So my question -- my third question is regarding the Japanese competitors because as we are -- I mean as we can see the market this year -- the IA market this year is quite sluggish. So for those Japanese players, they actually don't have a really good cost structure. So do you see any signs like they are moving out of China market? And -- or have you seen any sign like the Chinese peers, they are gradually gaining shares from those Japanese players?

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Unidentified Company Representative, [16]

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I think even -- of course, the Chinese players or Chinese peers, they have their advantage in China market. But those Japanese players, they also develop some simpler products for the market, I mean for the China market, with much reasonable prices. And also some of them, they also moved some of their production lines to China in order to improve their cost structure. But of course, we do see that some of the Chinese peers, they are growing quite nicely.

So in terms of the 5G opportunities, I think I have also answered this question quite many times. So in our point of view, I don't like many people keep talking about this, asking about this. And it seems like a really hot topic at this moment. But I think the biggest problems of 5G network isn't about technology or the technical problems but the business model. So as I just mentioned that we haven't seen many of our, I mean, customers or those operators, they started to invest a lot into the 5G network.

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Unidentified Analyst, [17]

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So could you please share your view on the outlook for the fourth quarter?

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Unidentified Company Representative, [18]

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Okay. So I think the best scenario for the fourth quarter is just flattish to the third quarter. It's not going to like -- it's not going to be slightly higher to the third quarter like the last year because there are still many uncertainties, I mean, in the market. And the home market is still in a turmoil, so we can only do our best.

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Unidentified Analyst, [19]

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So even that you expect the fourth quarter is going to be flattish, but could you please give us more detail about like which business you think can be -- outperform others?

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Unidentified Company Representative, [20]

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Okay. I think that our passive component business can still grow in the fourth quarter, and our power business is relatively flattish. And also our telecom power business is going to be flattish or slightly down on a quarter-on-quarter basis. And our fan business is going to be slightly -- maybe just slightly better on a quarter-on-quarter basis. And those are, as I mentioned, our Industrial Automation. I think this is a trough for this business. And finally, I think our charger business -- EV charger business is going to be relatively flattish in the fourth quarter.

Okay. So in terms of our production-based diversification, I think it's going -- there it's very unlikely that you will see any new plants in new countries, say, Vietnam because we already have our construction plants in Taiwan, in India, in Thailand. So I think there is very unlikely that you will see any new surprises.

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Unidentified Analyst, [21]

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Okay. As you mentioned that you have many construction plans ongoing, so -- because people still have started to see some good sign of the trade talks. So in that case, will you slow down your construction plans? Or you will keep investing?

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Unidentified Company Representative, [22]

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I think for this question, firstly, that Delta, I mean our -- we at Delta, we -- Delta is actually a conservative company in terms of the culture. So there is some risk that we wouldn't like to take. And also -- I mean compared to the semiconductors or the upstream companies that our [campus] and also our factories are not that closely compared to theirs. So I think that we will keep going and keep investing into this because those plans are already ongoing.

Okay. So for our investment in India, actually, we hired factory -- we've rented factories for our Industrial Automation business before we started to build our own factories because even before the trade war that we actually saw the potential of India market. And we just reviewed Indian business and we can see the Industrial Automation -- I mean the Industrial Automation in India is growing quite nicely. So we do see the potential of the Indian market.

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Unidentified Analyst, [23]

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Okay. So in order to like maybe further improve your product mix, would you consider any restructure of the businesses?

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Unidentified Company Representative, [24]

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Okay. Actually, we keep doing this. Many people only maybe see that we always investing into new areas or we keep diversifying our businesses, but we actually also do some restructuring along the way. So for example that we actually spin off our solar panel business many years ago. So we always -- we will keep -- always keep reviewing our current business mix and our portfolio.

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Unidentified Analyst, [25]

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Okay. So as you just mentioned that this will take some time for the 5G mass deployment. So if we looking into -- if we look at 2020, the next year. So do you see any growth drivers for the next year?

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Unidentified Company Representative, [26]

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Okay. So for the next year, as I said, there are still many uncertainties out there, but even so that there are still some supports of our business, let's say, even the IT -- I mean locations of our IT-related business might be not growing that much because we keep -- okay. So because we keep diversifying our applications into many other markets, for example, that we provide our progress to the home appliances. And also we provide our progress for the data center. So our power business is actually -- I mean year-to-date, it's actually growing a little bit.

And other than the power business, I think data center -- our data center solution business will keep -- continue to progress well. And also, as I said, I might be -- I mean we think that it might be the trough for our Industrial Automation business. So maybe hopefully next year, there can be some growth for this business, especially from a low base -- low-comparison base. But for 5G, it's still not that certain about the time it takes off. And also that we also have some expectation for our renewable energy businesses and our EV charger business.

Also, we think that energy storage systems will continue to grow. So those areas like the EV related and renewable energies and our Industrial Automation, the data centers we still expect them to grow for this year.

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Unidentified Analyst, [27]

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So because you just mentioned about your renewable energies, I'm curious can your renewable energy products or devices -- I mean can you provide your renewable energy products to the power plants? And can -- are they online products?

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Unidentified Company Representative, [28]

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So yes, we actually have a very small power plant in Japan, but that is more of experimental for the -- experimental purpose for us to try. So we are trying to see that if we can provide more solutions for that.

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Unidentified Analyst, [29]

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Okay. So did you see any -- okay. Can you please like provide some regional updates for your EV-related business because as I -- because I just read a study that it says in the U.S., the U.S. auto market is currently quite sluggish, I mean especially for the EV cars? But in -- the European EV market is still doing okay and that is mainly because of the regulation, I mean drive the markets. So do you see the -- I mean the similar -- do you see the similar things?

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Unidentified Company Representative, [30]

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I think that overall the EV -- or the EV cars are still in a very early stage. So the most important thing to really -- I mean to see this market takes off that the prices, I mean, have to be I mean more affordable for the mass and -- for those people and also that they need to have more infrastructure and...

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Unidentified Analyst, [31]

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Okay. So other than the EV business, what's your view on the current China IA market?

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Unidentified Company Representative, [32]

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Yes. We never have [a job] the automation. I mean the Industrial Automation is a must for the manufacturers in China. So it has always been a matter of time to see this market coming back, but we never have a job on it.

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Unidentified Analyst, [33]

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Do you see that Infineon, they transfer some orders, like their solar inverter orders to you?

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Unidentified Company Representative, [34]

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I don't -- I'm not sure about whether they have this business. I think they are an IC maker. I'm not clear about the details, but I think they are an IC maker instead of a solar inverter maker, but you may confirm this with our IR manager later.

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.]