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Edited Transcript of 2308.TW earnings conference call or presentation 28-Apr-17 7:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Delta Electronics Inc Earnings Presentation (Chinese, English)

Taipei May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Delta Electronics Inc earnings conference call or presentation Friday, April 28, 2017 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

* Judy Wang

Delta Electronics, Inc. - Corporate CFO

* Ping Cheng

Delta Electronics, Inc. - CEO and Director

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Presentation

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

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Welcome, everyone. Welcome to our First Quarter 2017 Investor Conference. First, we will have our IR Manager to report the results for Q1. But before that, we would like to share you some recent news regarding the recognition we received from different organizations.

First of all, Delta is a company winning the most -- first of all, Delta won the CSR Award from Global Views Monthly this year, including a first prize of CSR as well as the model prize of Education Promotion as well as the model prize of Environment Protection. So we won the Environment Protection award with our green building. In addition, we are recognized as the top 200 global greenest company from Canadian market research company and an NGO company called (inaudible). They investigate the companies with more than USD 1 billion market cap, while 10% of revenue is coming from clean energy. And then they rate the companies by their clean energy revenues, which refer to renewable energy, electronic -- electric vehicle and energy efficiency improvement.

Delta ranks #1 among all Taiwanese companies with more than USD 1 billion clean energy revenues. In my opinion, I think that clean energy will definitely be the trend going forward. Well, though we ranked #1 among other Taiwanese companies, I believe that we still have long way to go, because we only rank 59 among the global companies, while the #1 is Siemens.

Okay, so as usual, firstly, we will review the financial numbers. Okay. So the Q1 revenues were TWD 48.9 billion, up 3% Y-o-Y, down 14% Q-o-Q. The strong NT dollar had a profound impact on our revenues. For example, compared to the end of 2016, the appreciation of NT dollars versus U.S. dollars trade about 6% of our revenues. Sequentially, the proportion of each segments remains mostly unchanged with others growing little bit. Quarter-on-quarter, we see a seasonal decline in each segment. Gross margin had a biggest decline from a high base. Year-on-year, we see growth in every segment: 4% in Energy Management, 3% in Smart Green Life and 2% in Power Electronics. Gross profit in Q1 was TWD 13.3 billion, and the gross profit margin was 27.2%, which was up 4% compared to first quarter '16, thanks to the margin improvement.

R&D expenses, as a percentage of revenues, increased to 7.6% in Q1 from 7.5% in Q4 and a year ago. SG&A, as a percentage of sales, increased to 11.5% from 11.3% a year ago and 10.3% in Q4. So the total OpEx had 8% decrease quarter-on-quarter and a 4% increase year-on-year, which was moderate and in line with the pace of the second half 2016.

Even with the disadvantage of NT dollar, the operating profit still remained at same level as last year because of the gross margin improvement. Here, we provide some breakdown of operating profit by sector for your reference. In Q1, we had TWD 999 million in operating profit, which is within the normal range. Though the NT dollars was quite strong in Q1, we still managed to have a little foreign exchange income. Q1 tax expense was close to TWD 1 billion, representing 20% effective tax rate, which was lower than 2016. The net profit after tax in Q1 was TWD 3.9 billion, down 21% Q-o-Q and 1% year-on-year, thanks to the lower tax and lower non-controlling interests. So the EPS for Q1 was TWD 1.51.

Okay, so now we will start our Q&A session.

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Questions and Answers

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Unidentified Analyst, [1]

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I have some questions for CFO. If we exclude impact of foreign exchange in Q1, what is the revenue -- what is your revenue organically?

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Judy Wang, Delta Electronics, Inc. - Corporate CFO [2]

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So for the foreign currency, where as our Manager just mentioned that compared to the end of 2016, the appreciation of NT dollars versus U.S. dollar shade about 6% of our revenues, but we still managed to grow 3% year-on-year. So if you exclude the impact of foreign exchange, then we will have -- then we would have about 9% growth year-on-year.

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Unidentified Analyst, [3]

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So here I have 2 questions. So the first one is related to the currency. If the NT dollar continues to be strong, so how much would that impact on your revenues for this year? Should the revenue grow slower this year, do you have any adjustment strategy for your spending, especially your OpEx?

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

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So for the currency question I will have our CFO to answer.

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Judy Wang, Delta Electronics, Inc. - Corporate CFO [5]

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As you just saw on our numbers, even with the fluctuation in -- the currency fluctuation in Q1, we still managed to have a little income in foreign exchange. So I think that we have our practice to control the rates of currency fluctuation. I don't think the currency issue will have a strong impact on our CapEx and OpEx, because the OpEx and CapEx, it is something that you need to invest like every day that you can't avoid it. So the only thing we can do is to control the things we can control. Of course, then we will have our practice to control the risk of foreign exchange fluctuation. So in terms of the revenue growth, I think the lowest part of our businesses might be the Power Supply segment. So even within this segment, we still try very hard to diversify our applications into other markets, such as the medical market or industrial market.

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Unidentified Analyst, [6]

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So can you give us some idea how should we look at outlook for Q2 and rest of the year? And also, we are interested in possibility of improving your operating margins?

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Judy Wang, Delta Electronics, Inc. - Corporate CFO [7]

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I think the market demand is healthy in general. In terms of the business strategy, doing more solution based -- the solution basis business is the goal for entire company. I believe the solution business has a chance to drive our product emphasis in each segment. Sorry, I don't think that I can provide you any concrete numbers for your model.

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Unidentified Analyst, [8]

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Can I -- can you give us more color on your EV business, such as your market share in Europe?

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Unidentified Company Representative, [9]

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We just announced our plan of reorganization, and we have -- we set up a business group for EV business. So for the detail, I will have our CEO to answer you.

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Ping Cheng, Delta Electronics, Inc. - CEO and Director [10]

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So right now we have some charging products and some motor products for EV cars. In terms of the EV chargers, I think that we have a pretty high market share in Europe and America, because we include nearly all the European and American names, big car companies. So I believe that we have pretty high market share in these 2 regions. So as we mentioned, now we just set up a independent business group for the EV solution business. But you know automotive market, it takes a long time to see a little contribution on the revenues. So in the long run, I believe that you will see more and more contribution from the EV cars, but it is not going to happen like anytime soon. Other than the time investment, I mean, investing a lot of time in this business, also that it requires more an investment to -- for example, to receive the certificate from, look, ODM car companies, but it is just the nature of this market and this business. So for the electric vehicle solutions, BG, which is new this year, more specifically the products within this group are supplied to the Tier 1 car companies. So for the Tier 1, by the definition, what I mean is, basically, we supply -- directly supply the products to the car companies. So for example, we also have some fans for the cars -- for the automotive markets, for example, that you will see some fans under the car seats. But for this kind of products, we are -- they are not supplied into the car companies directly. So they -- mostly, they are supplied to the Tier 1 or Tier 3 suppliers. So for EV SBG basically, they handle the businesses with the car companies directly. If you're asking about the EV chargers, we build this business within our energy infrastructure, because this type of products, I mean, the EV chargers, they are not supplied to the car companies directly and they are more related to the energy infrastructure. For example, this kind of products, they need to be connected to the grids. So we just put it in our energy infrastructure solutions.

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Unidentified Analyst, [11]

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Can you share us the revenue breakdowns of your EV charger business, such as how much percent AC chargers, how much percent DC chargers and how much percent within energy infrastructure solution BG?

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Unidentified Company Representative, [12]

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Well, for your question -- for example, the onboard chargers, the DC-to-DC chargers because mostly this kind of products, they are supplied to the car companies directly. And in this case, because it takes a long time for the car companies to recognize the technology and the products of their suppliers. So once you have the chance to break into their supply chain, it makes them more difficult to replace you by other second source. So in this case, we have higher market share for this product. So in terms of the regions, the demand for EV cars or EV product is higher than other regions.

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Unidentified Analyst, [13]

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So can you give us some idea that which product may do better in Q2?

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Unidentified Company Representative, [14]

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So because I don't have a crystal ball, so I can't forecast the future. I can only talk about the -- I can share you some ideas about Q1. So the business, which was doing best is in Q1 is IA, actually. Because I cannot talk about the forecast, but I can share you the trends. So I believe that, like, the EV cars and automation, such as Industrial Automation will definitely be the trend in the future. So the other thing that -- I think the other driver for our business would be the data center solutions. So the product and components of infrastructure, such as our powers for servers, our UPS, our cooling solutions will continue to grow going forward because of the trend.

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Unidentified Analyst, [15]

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Can you give us the breakdown for -- with your new businesses framework?

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Unidentified Company Representative, [16]

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We don't have it right now, but I will provide it -- I will provide to you in next quarter.

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Unidentified Analyst, [17]

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So can you talk more about your businesses in China?

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Unidentified Company Representative, [18]

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Right. I didn't say that IA was strong, but it may indeed grow. So half of our revenues of IA is coming from China. So of course, China market is very important market for our IA business. I think there are some reasons for the better demand we've seen this year. Firstly, it is the government policy to drive the industrial upgrade in China and also the policies and strategy of promoting 2025 and Industry 4.0 help a bit as well. So in the past, for example, that there were maybe about 80 people -- 80 workers in a production line -- working for a production line, but now many of them, they only have about 20 workers working on the production line. I just read a report that states that China would be the region or market have more -- have the most robot arms in the future. But right now, that is Korea with the most robot arms. Other than Chinese -- other than the China market, we also have some achievements in U.S. market. For example, we have supplied our components to one of the big tool machine -- American tool machine company. In the past, they would have used our products, but right now, we have the -- we successfully broke into the supply chain and penetrate into the American market.

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Unidentified Analyst, [19]

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So for your new business category that if you look at this framework, which one will grow -- will have the fastest growth in the rest of the year?

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Unidentified Company Representative, [20]

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I think Automation and Infrastructure, they will grow faster than Power Electronics. And also the components will grow as well.

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Unidentified Analyst, [21]

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So can I say that we will have about, like, double-digit growth in your IA?

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Unidentified Company Representative, [22]

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I'm sorry, but I can't forecast -- I can't give you the forecast numbers, but I will say that Building Automation will continue to grow as well.

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Unidentified Analyst, [23]

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So what's your view on component business?

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Unidentified Company Representative, [24]

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I think for this business, it's tracking okay right now. We will have some new products for our component business and it will start to ship – to have some shipment in Q3. In these products, the efficiency and the quality are actually better. So I think outlook for this business is okay.

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Unidentified Analyst, [25]

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So can you talk more about your green power business?

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Unidentified Company Representative, [26]

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I can't talk about a specific client, but we do have some business with the Chinese wind power company.

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Unidentified Analyst, [27]

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Can you talk us -- can you give us some update on your Eltek business?

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Unidentified Company Representative, [28]

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I guess your question is the performance of Eltek in Q1. I think year-on-year, the revenues of Eltek in first quarter and in this year is actually lower than the one of 2016. So for Eltek, I will say that even with the amortization last year that is profitable both for this quarter for Q1, because there are some -- there were some put off projects in Q1, because the business nature of Eltek is more project-based. So in Q1, that we see a slower revenue growth compared to a year ago.

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Unidentified Analyst, [29]

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So last question is about -- is regarding to Delta Thailand. So what's your relation between Delta Thailand? You just made a transaction with Delta Thailand early this year.

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Unidentified Company Representative, [30]

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So basically, it is a business decision to see that what is the best resource allocation for each company, which is Delta Thailand and Delta. But we don't have any further plan to change our relations with Delta Thailand in the near future. Actually, the renewable energy only accounts for a very little portion of our energy consumption. So it's actually pretty hard to have all your energy coming from the renewable energy. I told that we can have all our energy sources replaced by the renewable energy. But what we have been doing is, we try to reduce our energy consumption by all means. So instead of trying to get other energy sources replaced by the renewable energy, what we have been trying to do to make efforts -- we try to reduce energy consumption everywhere and also we improve our energy efficiency in our product, in our production lines, in our offices, our office buildings. And that is also the way that, for example, the Carbon 200 and the Dow Jones Sustainability Index, they are using this -- how much energy you can reduce compared to base you used to have to run the green companies.

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Unidentified Analyst, [31]

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So I've got some questions for power chokes. Because I know that you have more investment on your passive business. So is there anything that like, you have more -- you get more share from other customers or you have some products for other new markets? So can you give us more detail on this question?

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Unidentified Company Representative, [32]

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So for our passive business, the strategy of this business is basically, it's the aim to diversify our applications to other markets other than the mobile or smartphone markets. But this investment is not only for the mobile products, it is also for the future business, our business for automotive market.

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Unidentified Analyst, [33]

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So what is the purpose for your capacity expansion this time?

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Unidentified Company Representative, [34]

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Well, I don't have the specific spec for the power choke, but I'm sure that is definitely the size of the new power choke is smaller than old one. For the ENERGY STAR award, we won this recognition with our ventilation fans products. In the past, our fans, we have -- we had more fan products for the industrial market and industrial applications. This is a different case that we won this award with our consumer ventilation fans. The traditional ventilation fans you see in bathrooms are quite noisy and loud, but the technology we use for -- we apply for our ventilation fan is DC brushless. So it is quite quiet. And more importantly, it is energy efficiency as well. Compared to the AC ventilation fans, it saves about 30% energy. Because the frequency of using ventilation fans is actually quite high in every family, so the American government, they just gave us this revelation of saving the family energy consumption with this new type of ventilation fans. For our trade show in Hanover this year, we demonstrated big size fans this year, which is industrial fans used in the factories.

Well, if you have no more questions, thank you for coming today.

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Unidentified Company Representative, [35]

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Thank you.