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Edited Transcript of 2308.TW earnings conference call or presentation 30-Apr-20 7:00am GMT

Q1 2020 Delta Electronics Inc Earnings Presentation

Taipei May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Delta Electronics Inc earnings conference call or presentation Thursday, April 30, 2020 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

* Ping Cheng

Delta Electronics, Inc. - CEO

* 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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Okay. So welcome to Delta Q1 2020 Investor Conference. So in light of the spread of COVID-19, this conference would be a live webcast only. So you may raise your questions via the online platform, and we will answer your questions after the presentation.

Now we will have our IRO, Rodney, to report the financial numbers of Q1.

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

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So thank you for attending this live webcast. So all the financial numbers are reported based on IFRS, and the consolidated numbers have been reviewed by a CPA.

So being impacted by the global outbreak of COVID-19, sales revenue in Q1 was up 3% year-on-year and down 18% quarter-on-quarter, even with the contribution from DET. Gross margin in Q1 slightly increased to 26.5% from 26.3% a year ago, but dropped from the peak of 29.3% in Q4, with gross profit up 4% year-on-year but down 26% quarter-on-quarter.

Year-on-year, R&D and SG&A expenses increased by 18% and 13%, respectively, which were largely related to the consolidation of DET and amortization from the acquisitions. Q1 R&D expense as a percentage of sales slightly increased to 9.9% from 9.8% in Q4 and 8.7% a year ago. SG&A as a percentage of sales increased to 13.0% from 11.6% in Q4 and 11.8% a year ago. Therefore, the OpEx ratio hit a new high at 22.9%, with the sluggish demand resulting from COVID-19. OP margin in Q1 dropped to 3.6% from 7.9% in Q1 and 5.8% a year ago. Thanks to the consolidation of Delta Thailand, year-on-year, we found some growth and profit improvement for Power Electronics.

For Automation, with the relatively flattish growth, the profit was down by 31%.

Regarding Infrastructure, the sales and profit dropped more significantly due to the slow demand in many markets, such as telecom power, network in display -- and display.

Sequentially, we had some seasonal decline in profit contraction in these 3 categories. So the percentage of Power Electronics remained at 51% in Q1 compared to the previous quarter. Automation was slightly up to 16% in Q1 from 14% in Q4. Infrastructure slightly dropped to 33% in Q1 from 34% in Q4. The operating -- the nonoperating profit was around TWD 857 million in Q1, which was within the normal range.

In Q1, we had TWD 2.8 billion profit before tax, down 28% year-on-year and 55% quarter-on-quarter. Our EBITDA in Q1 was TWD 6.8 billion, which was down 3% year-on-year and 33% quarter-on-quarter. Q1 tax expense was about TWD 600 million, representing 21% -- 21.4% effective tax rate. It was significantly lower a year ago because of a one-off reversal. The net profit after-tax in Q1 was TWD 2.1 billion, down 39% year-on-year and 59% quarter-on-quarter due to the higher tax rate. So the EPS in Q1 was TWD 0.8.

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [3]

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So now you may raise your questions online.

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Questions and Answers

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Rodney Liu, Delta Electronics, Inc. - IR Officer [1]

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So the first question is, can you please share the outlook for each segment in Q2?

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

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So at this moment, we have already passed 1/3 of the second quarter. So we have higher visibility about the second quarter. So in terms of the outlook for second quarter, we think it's much better than Q1 because there was some abnormal factors in Q1, such as COVID-19 -- the impact from COVID-19.

So in terms of the laborers' return rate, actually, we have nearly achieved almost 100% by now. So in order to maintain the normal operations in the factories, we need to prepare our workers and laborers, one mask for each day. So actually, we actually built up a production line for making this mask -- medical mask. So actually, the capacity for this mask, we can make around 50,000 masks 1 day.

Okay. So our -- some of our businesses are doing okay or doing well, including our clean fan business and passive business. But some of the segments, which are still highly uncertain, I mean, in terms of the outlook, for example, our EV solution business. And the main reason for that -- because many of our OEM clients, they are actually still closing their factories and shut down many of their factories and production bases.

So regarding the outlook for EV solutions, it's still relatively uncertain.

But for our Industrial Automation business, if you look at the China PMI in the second quarter, we believe that IA business in second quarter is going to be better than the first quarter.

However, in terms of our Building Automation business, because many of the cities, like, especially America, are locked down at this moment. So there are not so much things we can do at this moment.

So we have -- we might have better visibility for the second quarter. But in terms of the second half, like the Q3 and Q4, there are still too many swing factors being affected or impacted by COVID-19, including the outlook or the demand for passive components for IT devices and for the 5G. So that is something that is still too early to say.

Okay. So in terms of the electronic components, there is some shortage in the market. But so far, we are still doing okay because we still have enough inventories at hand. But because many of these components are actually made or produced in Malaysia and Philippines, those countries, which are still -- which is still applies for the slight lockdown policies. So if this kind of lockdown policy is going to be the case for the next few months, there might be some shortage for the components. But it's still really is subject to the -- very subject to the bargaining power of each company, because we are the main customer and the bigger -- much bigger customer for many of our suppliers. So compared to many of other peers that we believe that we might have like better bargaining power.

So -- but the demand is one thing and manufacturing is another thing. So still another issue that many people may know that is about logistics. So even though that the demand is okay or that you don't have any problem with the capacity or with the manufacturing. But the logistics is still a problem because many cities are still locked down at this moment. But in general, I mean, generally speaking, within the Q2, the demand in Q2 and the outlook in Q2 is going to be better than the first quarter, though we're still not sure about the outlook for Q3 and Q4.

But in terms of the impact of COVID-19, I believe that our employees and our -- I mean the company has -- have already done the best we can do. So I think, currently, we are still doing okay in terms of the management of this COVID-19 event.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [3]

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So despite the -- can you talk about the progress in Delta Thailand?

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Ping Cheng, Delta Electronics, Inc. - CEO [4]

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I think that after acquire or integrate for nearly 1 year that we think that everything is on track right now.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [5]

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So the third question is, which segments are you believe are stronger than expectation and which ones are below expectations?

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

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So I think that in terms of those business which are below expectations, I believe those are the EV solution business, telecom powers and networking business.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [7]

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So how is the demand for Power Electronics business given the smartphone market is actually quite low now?

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

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I think the expectations and viewpoints for the smartphone demand are quite divergent. Some people believe that this is going -- I mean there is going to have to see some growth for the smartphone demand. But some people are relatively passive. But in terms of our passive business, I think that we are doing okay.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [9]

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So do you have any visibility for notebook components such as powers and fans? What is the outlook for second quarter -- sorry, for second half?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [10]

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So as I just mentioned, in Q1, actually, we got some urgent orders for these IT components. And not so many companies, they are able to digest this kind of urgent orders and -- because they don't have enough capacity and operation capability. But for the outlook, I mean, this kind of outlook or demand in the second half, it's -- which is really subject to the development of COVID-19. But in general, I believe this COVID-19 event has changed the trend or the style of working pretty significantly.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [11]

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Can you give us more color about your IA business in China?

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

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Yes. We do see some more little recovery in the China IA market. But -- and also interesting -- but interestingly, there are some unique vertical that which were not in the market or which were not in demand that much before this COVID-19, which are the masks -- mask production devices.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [13]

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So can you talk about the competition landscape in China -- in the Chinese IA market?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [14]

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So the competition is always there. So it's very hard to say whether there is any significant change in terms of the competition landscape. But we keep doing the things we believe that is the right thing to do. So for now, we didn't really see any significant change in terms of the competition landscape for now.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [15]

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So when can we expect to see the breakeven of your EV business?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [16]

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Yes. So just as we just mentioned, many of the global OEMs, they actually lock down their factories at this moment. And even there are some communities, they don't support -- I mean, those OEMs to go back to work. I mean, in order to protect the health of the workers. So if you -- because the automotive business is really highly, highly subjected to this COVID-19, because if you look at the pictures or the photos in major cities in the U.S. right now, there are actually no cars on the road. So it's hard to forecast before this COVID-19 settles.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [17]

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So can you share the plan -- the CapEx plan for this year?

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [18]

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So we keep our CapEx plan unchanged for this year.

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Ping Cheng, Delta Electronics, Inc. - CEO [19]

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So in terms of our factories in India, the -- because especially for those, I mean, the production base -- our production sites in Southern India because the COVID-19 is more severe, I mean, in those areas. So currently, there are not so many workers in the factories in our Southern India factories.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [20]

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And can you give us more details about the financial numbers for the second quarter?

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Ping Cheng, Delta Electronics, Inc. - CEO [21]

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Sorry, we are not able to share the details or this kind of financial forecast for the future.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [22]

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So how should we think about the expenses for second quarter and for this year?

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [23]

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So many people are concerned about our expenses, especially our SG&A expenses. But I have to remind you that when you look at our SG&A expenses, which includes amortizations from our previous acquisitions. And also, if you look at 22.9% expense ratio, so there are actually 2 reasons. One is, of course, it's because of the lack of economic scale in Q1. And the second reason is, actually, when you look at the expenses in Q1 and compared to a year ago, which is not apple-to-apple because you still need to consider the extra amortization from the acquisition of DET.

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

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So in terms of -- so to answer your question about is there any impact from the historical low petrol price? So yes, if you look at the market prices of EV cars or hybrid EV cars compared to the traditional cars, actually, the EV cars are still more pricey. But even the petrol price is quite low at this moment. But in many European countries, they actually have these policies and standards for the emission -- carbon emission rate. So the trend is still there. So there is not going to be so much different.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [25]

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So would there be an impact on your gross margin when there is some pricing inflation of components in the market? And is it possible to transfer that pressure or cost to your customers?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [26]

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So actually, the passive components is not a big part of our materials. And also, many or the most suppliers, we have a long-term -- pretty long-term commitment and relationship with our suppliers. And this is also the same case for our customers because we also have a long-term relationship with our customers. So we don't want to ruin that relationship to pass through this kind of pressure to -- just right away to our customers. So we will try to control the cost.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [27]

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Have you seen any of your customers moving all their factories out of China?

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

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We haven't seen this very big movements of such moving out of China trend. But I think the problem is still the same. It's not about where you produce the products or where you set up your factories, but about the supply chain. So -- but in the future, we believe that China is going to be more diverse in terms of the production bases. And it's not going to be so concentrated as the old time.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [29]

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So what does the CapEx plan for this year? And would you accelerate the progress of your factory automation when COVID-19 is over? In that case, will you achieve your goal of labor reduction earlier?

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [30]

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So our CapEx number is -- as I just said earlier and in the previous quarter meeting that we have no change on our CapEx plan for now. So we will keep that number.

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Ping Cheng, Delta Electronics, Inc. - CEO [31]

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In terms of factory automation, it's actually a complicated or sophisticated process. So for the new products, of course, we can try to achieve as automatic as possible. But for some of the old products or old models for our customers, if our customers don't allow us to do some change -- to make some change on the production process, then actually -- we don't have so much -- we have -- we don't have so much things we can do on this. But anyway that we always keep improving the automation level of our factories.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [32]

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So the Chinese government has officially defined new infrastructure. Is your IA business going to benefit from this? Can you offset the weakness of European and American markets? Any pricing pressure on your IA business?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [33]

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So yes, of course, that -- I think that like, telecom power business, our IA business is likely to benefit from this kind of infrastructure budgets or plans.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [34]

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So why Delta network has been underperforming the peers for a while? Do you have any improvement plans? When can we see the recovery?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [35]

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Partially, I mean, the underperformance of Delta Networks, partially because of the tariff issues in late last year. And so for -- because of that. So we actually moved our production lines from China to Thailand during this period. So there are some -- or there were some hiccups during this moving period and progress. So I think that is a learning curve. Going forward, I believe that this is going to be better.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [36]

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So can you please talk about whether you have any kinds of prevention plans in response to COVID-19 in your factories and offices? Any one of your employees has -- have been infected? How to maintain normal operations in your offices and factories?

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Unidentified Company Representative, [37]

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So just right after the Chinese New Year, that when everyone was back to the office, we immediately set up a dedicated team for preventing this COVID-19. So we got 2 employees in New Jersey, which were infected, and 2 in Spain were infected. But for the rest, we don't have any other employees have been infected.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [38]

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Do you see any postponed in the 5G base station construction or implementation because of COVID-19?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [39]

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Yes, we do see some postponed because many cities are locked down at this moment.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [40]

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So how should we estimate the dollar contents of Power Electronics in the next-generation smartphones? Is it going to increase by a lot?

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Unidentified Company Representative, [41]

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So in terms of 5G smartphones, of course, there will be more components within one phone in terms of volumes. But as our Chairman just mentioned, we do see some postponed in terms of the 5G infrastructure construction. But if you ask me, when we will see more 5G smartphone? That is not our status. Subject to our customers. So we are ready here, but we still need to wait for the calls from our customers.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [42]

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So can we say that we have already seen the worst case of Delta Thailand?

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Ping Cheng, Delta Electronics, Inc. - CEO [43]

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Yes. So -- because we have been doing this integration for nearly 1 year. So we think that in terms of the manufacturing, it's going to be better and better. But right now, some things on our minds about the demand instead of the manufacturing capability. But demand is something out of our control. But if you ask me about the manufacturing capability in Delta Thailand, I think that we are doing much better now.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [44]

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Okay. So it seems that the higher GP margin businesses, such as IA, telecom powers are moving slowly. But those lower GP margin business are growing faster. In that case, can we still expect any GP margin expansion? If yes, what is the reason?

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Ping Cheng, Delta Electronics, Inc. - CEO [45]

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Yes. Of course, the product mix is one of the key factors for the GP margin. But the Automation level and the cost control -- cost structure are some other factors in terms of the GP margin.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [46]

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So can you share the numbers or details about the capacity in China and outside of China?

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Ping Cheng, Delta Electronics, Inc. - CEO [47]

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So the capacity in China is about 67% to 68%.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [48]

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So can we expect the Q2 -- I mean, the GP margin of Q2 is going to be better than Q1 and a year ago?

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Ping Cheng, Delta Electronics, Inc. - CEO [49]

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Yes. If you ask me the gross margin in Q2, it might be better than Q1.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [50]

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So have you seen any shortage in electronic components?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [51]

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So there are actually many different kinds of passive -- of electronic components, including active types and passive types. At the beginning, that's something we are -- we were more worried about is the mechanical components. And later on, then we were worried about the packaging materials. But it turns to be okay. So at this moment, so far, that we think we didn't really encounter any severe or serious problems in terms of the shortage.

So if you ask me about the visibility or the outlook for Q3, I think it's still way too early to comment.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [52]

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So any targets for this year's and last year's GP margin and OP margin? Is it possible to see your OP margin going back to 10% level?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [53]

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So every year, we do have this kind of internal targets for the profitability. But it's still really subject to the demand and the macroenvironment. But if you ask me about the OP margin, I think that it's less likely to going back to 10% level in the very near term because, right now, we have more amortizations from the acquisitions. So that is one of the main reasons.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [54]

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Can you talk about the inventory turnover cycle in Q2 or Q3?

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Shu Ling Wang, Delta Electronics Inc - CAO and Head of Finance Department [55]

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So I think that if we spend a normal, I mean, the normal seasonality in Q2 and Q3, then you should expect the similar inventory turnover rate as neutral.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [56]

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So can you talk about your main products within your EV solution business?

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Ping Cheng, Delta Electronics, Inc. - CEO [57]

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I think the main products is still on board charger and some power management products.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [58]

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So is there any change on your -- this year budget?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [59]

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Yes. We just done our Board meeting yesterday. So we didn't have any change. We keep our -- this year budget unchanged.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [60]

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So do you see any CapEx cutting -- any signs of CapEx cutting from data center guys?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [61]

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I think that because of this -- the recent working -- work-from-home trend, more and more people are working from home and watching Netflix at home. So at this moment, we don't see any big sign of budget cutting or the market slowdown of this data center guys. We -- somehow, we believe that after this COVID-19, the demand or the need for this data traffic is going to be much different, especially after this COVID-19. So I can say that in near term, that we didn't see that.

So I think that we have answered all the questions. So we still have a little time. So if you still have any other questions that we are -- I mean we will still be here, so you can just raise your questions online.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [62]

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So do you see any signs of more demand from the cloud service especially in China?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [63]

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Yes. I think that it's not only happening in China. It's actually happening in many countries, including European countries and markets.

Yes. So we actually have some projects with these kind of cloud service companies. And products or solution we provided to them is our data center solutions and our expertise in our data center solution is energy management. So we believe that by taking advantage of our expertise, we help them to save a lot of power consumption and energy.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [64]

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So are you still, I mean, going to increase your capacity in the regions or areas outside of China in the next 2 years?

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [65]

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As I just mentioned that, at this moment that we -- the capacity in China is already much lower compared to 2 years ago. So right now, the capacity in China is only 68%. So I think that for the time being or -- the capacity in China is going to keep at this level for a while.

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Ping Cheng, Delta Electronics, Inc. - CEO [66]

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But also that it depends on the progress of the construction -- factory construction plans in India because of the COVID-19. So -- and there was some delay in our India factory development. So generally speaking, we believe that this capacity rate in China is going to keep that level for some time.

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Rodney Liu, Delta Electronics, Inc. - IR Officer [67]

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So is there any difference in terms of the speed for 5G base station -- I mean in terms of the telecom power and for 4G?

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Unidentified Company Representative, [68]

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I think that is still -- in terms of the architecture of 5G, it's actually quite different from 4G. So it's really hard to give a concrete number for that because the whole architecture and structure is different. Maybe for a single base station, the power consumption is going to be lower. But you are going to need a lot more base stations for 5G network compared to 4G network. But it's really hard to say that where it is going to be like 50% -- 30% to 50% increase is not a final number or comfort number for that.

Yes. So you may hear about a term like serverless data center. So I don't want you to misunderstand this concept. Actually, they're not saying that you don't need any service in the future anymore. But they are just applying this virtualized -- virtualization for your servers. So each server, it has to carry more data. So it doesn't mean that you are using less and less servers. So I think it's less likely that you will see less demand or -- lower -- sorry, lower demand for server powers, at least in the near term.

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Ing-Jiunn Hai, Delta Electronics, Inc. - Chairman [69]

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So I hope we have answered all the questions. So if you don't have any other questions, so thank you for attending this online meeting. So hope everyone can stay healthy and stay safe. Thank you.

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