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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello everyone. Today is a nice day. So hopefully, we are going to have such nice days in the coming months. So today, again, we will have our IRO to report the financial numbers to you. So please just feel free to ask questions after this session.
[Technical Difficulty] consolidated numbers have been viewed by CPA. The Q1 revenue was TWD 92.9 billion, representing a 13% year-on-year growth and a 12% sequential decline, which is seasonal. In terms of gross profit, gross profit in Q1 grew by 14% year-on-year and dropped by 14% quarter-on-quarter due to an unfavorable product mix. GP margin in Q1 dropped to 27.5% versus 28.0% in Q4 but improved from 27.3% a year ago. In terms of the expenses, Q1 expenses grew by 14% year-on-year and contracted by 9% quarter-on-quarter with both SG&A and R&D increased by [indiscernible] compared to a year ago. So the OP margin in Q1 contracted to 9.1% versus 10.2% in Q4 but improved from 9.0% a year ago. And business-wise, we saw double-digit year-on-year growth and sequential declines in all segments. However, component businesses in general were weak, especially for computers and smartphones.
Within automation, Industrial Automation improved but Building Automation slowed. And in infrastructure, EV orders were strong but telecom and data center solutions were sluggish. Year-on-year, we had a significant profit expansion for Power Electronics, thanks to the improvement in the each component business. With some profit contracting for Automation and Infrastructure in Q1, sequentially, we saw profit improvements in the Automation and Infrastructure, while the profit of Power Electronics dropped by 26% due to [ disadvantage mix ]. So the operating profit in Q1 was about TWD 1.6 billion, higher than previous quarters.
So our pretax incomes in Q1, we had TWD 10 billion profit before tax, up 17% year-on-year and down [ 14% ] quarter-on-quarter. And for the tax expenses in Q1 was about TWD 2 billion, representing a 20% effective tax rate. The net profit after tax in Q1 was about TWD 6.9 billion, up 14% year-on-year and down 13% quarter-on-quarter. So the EPS in Q1 was [ TWD 2.56 ].
So please just raise your questions if there are any.
Can you give us more details or colors about the Q1 revenues, for example, which businesses were weaker and which businesses were stronger?
So in Q1, EV solution business grew pretty rapidly by 100% on a year-on-year basis, as well as the EV charger -- external EV charger business. Also in terms of the weaker businesses, I think those aren't only related to the smartphone application and consumer mobile applications. So in terms of -- for the first half of the year, I think the weakness trend of the consumer electronics will remain and as seen in the first half of the year. So -- but for the Q2 outlook, I think that typically that I mean, in terms of the seasonality, normally, I think Q2 is going to be better than Q1. And on a year-on-year basis, I think the Q2 is also going to be better than the previous year.
So for the -- I mean the weaker businesses are still the PC, notebook, smartphone-related applications, but I think that -- I think the consumer electronics can [indiscernible] actually, I mean, the [indiscernible] is actually doing not bad as well as data center-related application and networking business. So for the write-down, I mean, inventory write-down in Q1 was not related to any like one-off inventory write-off, it's purely accounting practice because we always adopt this stable accounting practice to write down the [ entry stocks ] and inventory. So when we are able to, I mean, have more [indiscernible] to the customers in the high season, we may have -- I mean we will have to reverse on it.
So I want to just follow up the questions on the inventory write-down because I know that you always adopt this kind of an accounting practice. So you will write down the [ agent stocks ]. And then also, you will have some ongoing reversals at the same time. So I just want to know more about the net impact about this, I mean, write-down and reversal process.
I think it actually depends on the macro environment. As I said, if we are able to ship more, I mean, products to customers in high season then we will have more reversals.
So I would like to know that the Tesla's aggressive pricing cut strategy in recent months has posed some pressure on suppliers. So have we seen any of our e-customers implement the same strategy or cut prices for our products?
So I think Tesla has been pretty active in the market. So I think, as I also, I mean, the management of Tesla also made it pretty clear that they were better to sacrifice some of the profitability in order to achieve or maximize their market share. I think we have touched on this issue, I mean, before. As I explained, the orders from the OEMs, auto OEMs, are not like, I mean, systemic orders from the consumer electronic customers. So it's not only like, okay, so we just -- we will have a pretty volatile order flows, I mean, in the near term. I think in general, the prices or the prices of electric vehicles are still, in general speaking, are still higher than the ICE vehicles. So it's pretty sensible, I mean, to see that the electronic vehicles are going to cut their prices in order to achieve larger market shares but I think that is just the nature of the business.
I think it's just like any other markets or businesses. You're not always going to -- it's impossible that you always just ride the growth of the market. You always have to be competitive enough in order to sustain your profits and market share in the market. But in terms of the clientele, we actually don't really work with the new OEMs. But we work with the -- like 70% of the top 20 global OEMs, so that would be our strategy.
So I would like to know whether there is any competent shortage in Q1? And are you -- do you think that it's going to see any improvements? I mean, if there was any component shortage in the supply chain.
I think the deliveries, I mean, of our EV business, if you know, it was actually pretty -- in line with our forecasts. So indeed, there are still some, I mean, just very minor issues of component shortage but it is insignificant. So that's why we still -- so we had like 100% year-on-year growth for our EV solution business.
So I would like to know the outlook about the Automation segment. Are you going -- I mean, are you -- do you expect to see a strong recovery in Industrial Automation business in Q2?
So I think, we indeed, we saw some improvement in recovery for our automation business and for our Industrial Automation business, but I would really say that we have already seen very strong recovery for the market yet. And for the building automation, I think the biggest subsidiary within this building automation segment is our -- is [ LOYTEC ] and it has been doing pretty well as well.
So I will say that in terms of the industrial automation market, the market, it's actually steadily improving but it's not really, really fast or really strong.
The next question is how do you see competition in the China OEM market?
I think that the competition is always there but in terms of the competition landscape, it didn't really -- it hasn't really changed much.
So my next question is related to the AI servers. So what kind of business can Delta do with AI servers? What are the specific challenges in product space? And have you seen an increase in orders for AI servers?
So I think even though everyone, I mean, on the earth is really excited about the development of AI servers but the thing is still, how do these AI companies make a profit from it. So their business models are still not that clear. So it's not like the Google's business. So you can make the profits or make the money from the advertisements. So my point here is, still, not until they really make it pretty clear about like how they are going to make a profit from this AI development, I think they are not really going to invest really, really huge amounts of its money into it.
So actually, even though you are just okay, should I say, just going to build up a traditional data centers, it's already really, really crazy. But if you want to, I mean, really build up or construct a AI-specific data center, it's going to be way more expensive. So I think that whenever the types of -- I mean, different servers, so I think -- but when it comes to the server, as the server power supply is the most important thing, is still the efficiency. So I think we are definitely going to take the part of, I mean, this market development for sure.
So the next question is, I mean, there has been a lot of noises in the car market recently. And there are also some noises talking about inventory correction of components. Do you see any changes in market demand and supply chain inventory?
I think we have briefly touched on this question before. So, so far, we haven't really seen any significant impact on this. So I think that we are on track to grow.
So next question is, how much have this -- the weakness of the Taiwanese dollar bring to the company's gross profit margin?
Actually, most of Delta sales are in U.S. dollars and most of the costs are also in U.S. dollars. So the impact of foreign exchange changes on GP margin is very limited.
So the next question is regarding the EV charger market. Do you have any thoughts on the mid- to long-term market share? Can you comment on some of the development trends in the industry, including market, technology and competitive landscape? Who are your major competitors in the market?
I think the EV chargers, I mean are actually part of the infrastructure for the EV development. But in terms of the EV charger itself, I mean the entry barrier for this product is actually really high. But the thing is, whether -- I mean, as EV charger provider or a supplier, whether you are able to make your products, I mean, connected to the power grid. And also whether you are able to have, I mean, really competitive cost structure. And then whether you are able to provide related systems charge, the whole solutions just like provide energy charger system along with the EV chargers. I think those would be the key, I mean, to being competitive in the market.
So in the first half of the year, the overall server market, I mean, appeared to have weaker demand. How have you been impacted by this? And what is the outlook for the second half of the market?
I think since the beginning of this year, the growth momentum of the server market has really slowed down when we compare to the previous year. But considering the ongoing trend of, I mean, all this AI development and the data center and the data traffic, so I think it's going to be temporary, I mean this kind of a slowdown.
So the next question is what is the proportion of production capacity in China compared to other countries? Will you accelerate globalization and increase production capacity outside of China in the future?
I think China's production capacity still accounts for about 60% of the entire group. We have indeed continued or started construction of production capacity outside of China, hoping to have greater flexibility in serving customers.
I think the next question is delivery margin this year. I think the delivery margin is going to be under some pressure this year just because we have many fast-growing businesses, just like the EV business, [indiscernible] business, and e-charging business, but those actually carry lower GP margin. So it's mainly related to this, I mean, product mix issue.
So the next question is, how long will it take for the inventory correction in the consumer market. Can we -- when will we expect to see the demand recovery?
I think we are not the end consumer but the maker. So it's not appropriate for us to really answer this question.
So the next question is, how do you see the growth potential of telecom power. What are the growth drivers after 5G?
I think this year most operators have actually lowered their CapEx plans. So I think that because the telecom based Asia market is weak, so although we are actively developing related businesses in data center, we may find it definitely to be very optimistic about this year just because of the underlying market softness.
So how do you see the recovery and growth rate of IA demand in China market after the reopening?
I think China is indeed growing market and of course, a very important market for every company but I think we are not only, I mean, concentrated in China market. But we are also focused -- focusing on the markets outside of China. And then we also want to accelerate the markets and the business outside of China.
So the next question is, was the recent bonds issue related to the distribution of dividends?
You can say that, not entirely, the company's operations require a significant amount of cash. So we often issue or repay debts for financial management purposes. The main purpose of issuing corporate bond is to [ lock ] the long-term interest payments. So while we issued bonds, we also reduced our borrowing of debt and did not increase the company's debt ratio due to the bonds issues.
Can you talk about your energy storage businesses?
Okay. So I will go into discussions. I think everyone have been really optimistic or has been really interested about the development of the energy storage market. So I think the market indeed has really high hope to the development of this market. But as our CEO just mentioned, so the energy storage business is not just a purely discrete products, so you have to be able to connect to the grid.
So if you ask me about the scale, I think it can be really meaningful but I think the key bottleneck is still on the battery supply. So I'm not saying that, I mean, there is still, I mean, significant battery shortage but the prices or the cost of batteries still remain pretty high. So I think it will be the bottlenecks every company has to early tackle down in the future in order to develop this business.
So the next question is, do you expect to see a double-digit growth for the overall company, I mean, in the next couple of years.
I think that, well, I can -- I'm quite confident about fast growth. I mean, already at this growth for our EV charger business in the next couple of years, considering the new -- I mean, the introduction of many new models.
And now we also have other growth drivers and growing businesses, I mean, within other 2 segments, including the Automation businesses and energy storage system business, though it is still quite tiny for the company and then also for our networking business and so on and so forth. So we actually see many growth potentials. We actually see growth potentials in many businesses. Of course, I think that we still -- there is also much room for us to improve [ funding ] in many aspects. So I think that we will keep going and keep working on the new and growing business.
So can you share with us the outlook of Delta Thailand?
I think Delta Thailand is an independently public-listed company, so we cannot speak on their behalf. However, we have a close partnership with Delta Thailand. So, well, the only thing I can say is, I know that they should have, I mean, pretty good growth momentum in the next few years. And then also, their capacity has started to increase rapidly in the next few years.
Can you talk about the CapEx plans for this year and next year?
So we are going to have many construction plans, I mean, in this 2 years. So for example, we are going to have -- I mean we are actually building a new factory in Taiwan and that is expected to be completed in the second half of next year. And now we already started expanding some capacity in China. And then also, we also have the plan to build up new factories in Europe and in the U.S. And then in Thailand, we are going to expand the capacity for 2 of the factories, I mean, Delta Thailand. And then we are also -- I mean, have some new capacity from the India factories. So those really are our construction plans, I mean, in this few years.
So -- and my next question really, what is the CapEx plan for this year? Will it be reduced due to the economic slowdown?
So last year, we actually had like [ TWD 21.8 billion ] cash. And for this first quarter of this year, we actually had 62 -- sorry, TWD 6.2 billion. So I don't think that this year is going to be slightly higher than last year because there were actually some deferred CapEx to this year because of -- there were some labor shortage and delivery shortages last year. And then I think because most of our equipment is actually self-made, so our plans are pretty flexible and not subject to significant changes due to the economics conditions.
So can you give us some clues about the margin trend or the profitability of your EV business this year?
I think it just started to make minimum profit. So it's not going to have very significant improvement in the near term. So we have already answered all the questions from the online audience. So do you have any other questions from the on-site audience?
So what do you see the IRA in the U.S.? Is it going to impact the business of Delta or are you going to benefit from this?
I think the IRA is actually related to a very significant investments of the infrastructure. So I think according to the IRA in order to have or to get a subsidy from the government that you have to have your products made in the U.S. So that's why our CEO just mentioned -- so as our CEO just mentioned that we are going to have some new capacity, I mean, in the U.S., I think that is also partially for this IRA.
But there are still some issues. I mean, for example, if you want to make the products in the U.S., the costs are going to be higher. For example, the labor cost is definitely much higher than you may have got elsewhere. And then also, the supply chain is also another issue because the supply chain in the U.S. is actually not as comprehensive as it is, I mean, for example, in China or in other countries.
So while you do really have and many options when you choose your suppliers, the cost is definitely going to be higher. So eventually, the consumers will have to pay for it. So we will keep an eye on this trend.
So still, my next question is related to EV business, because I -- as you can see, some of the OEM statements started talking about to cut the prices. So as a Tier 1 supplier, are you facing or experiencing any kind of I mean, price cutting pressures from your customers?
EV -- the market -- EV market is actually a massive market. And also the EV customers, which are the OEMs, they are actually crystal clear about every single [ BOM cost ], I mean, of their materials and then they're also pretty clear about -- it's not easy for any supplier to get their orders, for example, that you have to invest a lot. And also you have to have many, many upfront investments in order to get orders from the OEMs. So you are not going to get the revenues or get any kinds of, I mean, money or profit in the first couple of years when we -- when you start to have the business with the OEM clients.
So I think in terms of the entry barrier, this is pretty high, so just because it's not easy for any supplier to make a profit, I mean, from this EV component business. So I think in terms of the pricing, I mean, as a Tier 1 supplier, it's actually stable now. But of course, going forward in the future, I mean every supplier will still need to take some responsibility for the customers to reduce the costs. So that is also something that every supplier, I mean, including us, we will have to continually work on this. But as I said or as I already explained, so this EV business is not going to be a very high-margin business. At the very least, it's not going to be a very high-margin business at the beginning. So that would be the rough idea for this business and market.
So can you give us like a little more details about your inventory write-down practice?
So our practice is, we actually keep monitoring the inventory in our warehouses. For example, if the -- some of the materials or components, they have been in the warehouses for 90 days, then we will actually recognize a certain percent of inventory value write-down of it. And the next level is 120 days, 180 days and a year or so.
So CEO just mentioned that you are going to construct some new factories, I mean, in the next couple of years. So what are the purposes of these construction plans?
I think the -- with -- that's just because we actually expect to grow the company, to see the company grow, I mean, in the next couple of years. So we will have to build up the capacity beforehand. Before -- because if you start, you just start -- for example, you just start to look for locations or land and you're acquiring and then you build up buildings or factories or capacity, you won't really have the capacity or the new capacity until in 3 years, so that's the reason why we will have to do it right now. So the reason we will have to, I mean, the -- do all those construction projects because we have to, I mean, be prepared and then to get ready for the new orders, I mean, in the future.
So can you talk about what are these new capacities for?
So the EV business is only one-off locations and EV charger, I mean, has another one. And then also, we have moved or shifted some of the production from China factories to elsewhere, for example to the U.S.
So if your customers, I mean, require you to shift your capacity elsewhere, will your customers pay for it and is subject to the negotiation process because for example, if your customers don't really have many options or certainly in terms of suppliers, they will have to pay it, but if they have, I mean, 3 to 4, let's say, suppliers that you will have to, I mean, pay for it yourselves.
So we actually have shared about our strategy of -- I mean, the centralized manufacturing strategy. So we actually have been working on this, I mean, for many, many years. And I think we also made some -- we also took same approach, I mean, in 2007 (sic) [ 2017 ]. So before 2007 (sic) [ 2017 ], actually the manufacturing or the factories in different regions, they were, I mean, managed independently. But after 2017, we have established a global manufacturing office, so to streamline all the manufacturing processes. And then also, that is one of the reasons why we are able to be more agile in terms of shift some of the production from a country to another.
So what we have been doing is, we have been accumulating the experiences of manufacturing and because we have this, I mean, centralized and global manufacturing office, so we are able to duplicating the success, experience, I mean, from a factory to another factory, maybe another region.
The final question is related to the EV chargers.
I think as our CEO just mentioned, the ancillary for the EV chargers is actually really high. So even for the suppliers or some companies, they are not the electronic component maker or ancillary. They also like to participate in this market. But eventually, it still depends on your competitiveness, I mean, in the market. For example, if you look at EV chargers, I mean, it doesn't really look very complicated. But it actually is still -- includes a very profound know-how to, I mean, know-how of it. It's just like the safety issue. And also for the fast charging, DC charges, it's even higher entry barrier, I mean, for many suppliers that are then aspiring in this area.
So if you look at the fast chargers, the output, the power output of them are easily like over 50 kilowatt, 100 kilowatt or even all the way to 200 kilowatt. So it's not like the power output of your home appliances. So the situation is going to be very important and how -- and also whether you are able to connect to power grid and whether you're able to, I mean, to you have the software to have, I mean, profitable business model from it. So those are part of the key, in terms of, to, I mean, make a profit from this business.
So can you talk about the cooling for -- can you talk about the cooling technology or the cooling solutions you have?
So I think traditionally there -- you think about the cooling, there are more or normally, they were more related to the components, for example, the cooling fans. But nowadays, there are actually more and more new cooling modules or cooling systems. So for example, the liquid cooling or just hybrid cooling system. So I think we actually have a big, comprehensive product offerings and technology. So I think the technology is still, I mean, keeps updating and developing.
I think in terms of the product portfolio, we are -- I mean, we actually have a wide range of solutions for our customers, but we still keep an eye and always thinking about whether there are still any other new applications there where we are able to find the opportunities there.
Okay. So if there are no any other questions, so thank you for coming today. Thank you. Thank you again. [Statements in English on this transcript were spoken by an interpreter present on the live call.]