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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. Welcome to our Q3 2020 investor conference. We have released our financial numbers yesterday. So as usual, we will have our IR Rodney to report the financial numbers of Q3. And after that, we will have a Q&A session.
So thank you for coming to our virtual investor conference. So as usual, consolidate -- so as usual all the financial numbers are recorded based on IFRS and the consolidated numbers have been reviewed by CPA.
So our Q3 revenue was up 10% Q-o-Q, which is seasonal and 7% year-on-year. Thanks to some cost savings improvements, so our GP margin in Q3 was 31.9% with GP up 21% year-on-year and 7% quarter-on-quarter.
Ratio-wise, the GP margin was slightly slower than the previous quarter, which was mainly because of in Q2 we had some one-off incomes, which we talked about that in the previous quarter. So -- and the mix improvements didn't really -- wasn't different, I mean, compared to Q2. So that's why the GP margin in Q3 was slightly slower than Q2. So same as Q2 with limited traveling and physical trade shows during COVID-19, Q3 SG&A was down 10% year-on-year and only up 3% quarter-on-quarter, while R&D expense just moderately increased by 4% year-on-year and 3% quarter-on-quarter. As a result, R&D expense as a percentage of sales, decreased to 8.6% in Q3 from 9.2% in Q2 and 8.8% a year ago, which was the lowest level in 5 quarters after the second quarter of '19.
So SG&A as a percentage of sales also dropped to 9.9% from 10.6% in Q2 and 11.8% a year ago, which was the lowest spread in 21 quarters since the first quarter of 2015. So the OpEx ratio declined to 18.5% in Q3 from 19.8% in Q2 and 20.6% a year ago, which was the lowest in 11 quarters after the fourth quarter of 2017. So with the better operating leverage, OP made a record high in Q3, which was up 89% year-on-year and 13% quarter-on-quarter. And OP margin also hit a new all-time high at 13.4% compared to 13.1% in Q2 and 7.6% a year ago.
So sales wise -- I mean, in terms of the performance by segment, sales-wise, the demand for Power Electronics remain pretty strong and Infrastructure sequentially pick up a little bit in Q3. While the demand for Automation turned softer. So please note that -- I mean, in terms of the earning by segment, please note that we made a slight change on the way we categorize or distribute settlement incomes. In the past, there was a minor difference between the sum of each segments.
Each segment's income and the total OP number on the balance sheet -- on the income statement, that difference was the expenses of corporate functions, which were not included on this page. But going forward, the expenses -- I mean, the sum of the -- each segment would be -- will equal to the OP number on the income statement. So the percentage of PE increased to 58% in Q3 from 54% and 53% in Q2 and a year ago. Automation was slightly down to 12% in Q3 from 15% in Q2 and 13% a year ago. Infrastructure also contracted a little bit to 30% from 31% and 34% in the previous quarter and a year ago, respectively.
So the operating profit was around TWD 913 million in Q3, which was within the normal range. So in Q3, we had TWD 11.4 billion profit before debt, up 75% year-on-year and 11% quarter-on-quarter. Our EBITDA in Q3 was TWD 15.5 billion, which was up 49% year-on-year and 9% quarter-on-quarter. So our Q3 tax expense was about TWD 2.2 billion, representing a 20% effective tax rate. The net profit after tax in Q3 was TWD 8.4 billion, up 64% year-on-year and 10% quarter-on-quarter. So the EPS in Q3 was TWD 3.23.
So now we have a look at accumulated numbers of the first 3 quarters. So the revenue was TWD 204.1 billion, up 2% from a year ago. So the GP margin increased to 30.8% from 27.3% a year ago, with GP up 15%. Our R&D expense ratio moderately increased to 9.1% from 8.6% a year ago. SG&A as a percentage of sales decreased from 11.6% to 11%. So the OpEx ratio slightly dropped to 20.1% from 20.2% a year ago. So thanks to the higher GP margin, the OP margin grew to 10.6% from 7.1% a year ago, with OP increasing by 55%.
So here, again, that we also changed, I mean, the way we categorize our profit by segment, as I just mentioned before. And then year-on-year, we won -- the steady revenue growth in Power Electronics, followed by a mild increase in Automation, but some contraction in Infrastructure. And profit wise, with the improvements in overall operations, we saw strong profit expansion in each segment.
So in terms of the nonoperating profit, we had about TWD 2.7 billion. The significantly higher nonoperating profit a year ago was mainly because of the noncash disposal gain of DET. So in total, we had TWD 24.4 billion of free cash income, up 7% from a year ago. Our EBITDA was TWD 36.6 billion, which was up 9% from a year ago. And the EPS in the first 3 quarters was TWD 6.95, which was flattish from the same period last year. But if we exclude the noncash and one-off disposal from the GP, the EPS in the first 3 quarters was up 34% from a year ago.
Okay. So the first question is do you have any about the customers' CapEx for the 5G and data center infrastructure in 2021.
So we do see some good demands and progress for the 5G as well as the DC -- data center deployment.
So in terms of the 5G deployment compared to the first half, we do see better demand and faster deployment. But it still depends and subject to the country -- different countries -- I mean, from country-to-country.
Okay. So as we see -- I mean, the next question is regarding the EV business. So as we see some recovery in the EV market, do you think that is a short-term rebound or this trend can be sustained -- this trend can be sustainable?
So we do see some recovery and pretty good demand for the EV business in the third quarter. And the main reason behind that was because many of our customers, I mean those OEM guys, they reopened their factories after the second quarter. So that helped a lot.
Beside one of the most famous EV maker in the U.S., we do see more and more traditional OEM guys. They are going to have more new modules for the EVs. As we can see, there are more and more infrastructure, I mean those EV chargers and quick chargers for the EV cars right now. And also the prices of those EV cars, I mean, the pure -- both the pure EVs or hybrid EV, the price are going down compared to a few years ago.
So also, I mean, this kind of business is largely or like a high relation or -- I mean, it's largely policy-driven, so I think a trend for the EV is pretty clear and concrete. So we have no doubt of the outlook -- or I mean the demand for the EV guys in the future going forward. And also because this kind of like auto industry, the lead time is pretty long. So the cars or -- sorry, the components we are making now are basically for the orders, which we received in like 3, 4 years ago. So we are pretty upbeat about the outlook for our EV car in the long run.
So how do you see the pricing trend of raw materials such as IC and copper? Can we transfer the inflection to the customer, the price inflation to the customers for the sake of offsetting the negative impact on margins?
So currently, the pricing of raw materials remain relatively stable, at least. We didn't really see any abnormal fluctuation at the moment. And our strategy is always to enjoy higher and more stable margins by differentiating ourselves with better technologies and products. So we will continue to work on this.
So can you share with us the outlook of each businesses for the next year? And also, can you give us a quantified number like how much you benefited from the automation this year?
So for the next year, I think there are still many swing factors, so including the uncertainty of the progress of COVID-19 as well as the political -- I mean, the political environment change. So it's hard for us to really make a forecast. For the factory automation, I will have our CEO to answer this question.
So after we acquired Delta Thailand, we have done a lot of automation within our Thailand batteries. We transferred our technology and know-how from how we did factory automation in China to Thailand. But we do believe there are still some room for us to further improve the automation level in Thailand.
Can you share with us your solutions of energy efficiency for the data centers and how much you might benefit from this trend?
I think the strong demand for data center are driven by many, many different factors. For example, that more and more people, they are watching the streaming videos on the Internet as well as that there are more people enjoying playing like online gamings. And also, I mean, especially for this year, many people they are required or they have to work from home or a study from home due to the pandemic of COVID-19. So I have no doubt of the long -- I have no doubt of the demand, the long-term demand for data center deployment.
So what we do for our data center customers is a strive -- we always strive to achieve as highest as power efficiency as possible because the power consumption, R&D expenses related to that has always been one of the biggest headache for the -- and burdens for the data center guys. And one of the most achievable ways to really reduce those kind of expenses is just to improve your power efficiency. And then in that case, you are able to consume less power and less energy and also use, like, less air conditioning. So that we -- do for our customers, our power efficiency solution -- power solutions -- energy solutions and our cooling design for our data center customers.
So how do you see the outlook and the deployment of EV chargers?
I think again, we have no doubt for the long-term trend or demand for the EV chargers. As you can see, there are more and more -- I mean OEM guys, they are having new models for the EV cars. So in that case, you would need -- you will need more and more infrastructure for the EV cars. For this year, I think that -- I mean the case is abnormal because the pandemic of the COVID-19. So this business is kind of under pressure. But I think that for the longer term or for the long run, there is, I mean, no doubt of the -- for the demand for this business.
So can you share more details with us regarding your clean energy-related businesses? And do you participate the development more of the Taiwan green energy industry?
Yes, we do aggressively participate in the green energy development in Taiwan. We not only sell -- we not only provide the wind powers as well as -- and our solar inverters, we also have what we call energy storage system business. Because for those kind of green energy or renewable energies, it's not only about how you convert the energy, it's also about how you store -- temporary store the energy. So that's our solutions. We not only provide computers, we also have the energy storage system.
So can you share with us about your outlook, the growth outlook for Q4 and Q1 of next year?
Well again, I would say that because there -- I mean Q4 and Q1 are the traditional lower seasons for the company. So sequentially, there might be some small decline. But compared to the previous year, I think that we will strive to -- I mean we will do our best to maintain some growth. But again because there are still too many swing factors and uncertainties in the macro environment, so it's really hard to forecast.
So as we know that , like, the U.S. is going to have their election for the President. So do you have any idea if Mr. Joe Biden wins the election? How is this going to impact Delta's business? And what if Trump wins the -- Mr. Donald Trump wins this election. Well, how are you going to be impacted?
It's hardly -- we can hardly really forecast the impact. I think this is the reason why we always try to maintain a relatively diversified portfolio, including our product portfolio and our production locations or even the customer -- our customer composition to -- we try to reduce the risk to the company.
So what is the driver for DET strong operating margin improvement despite the gross margin decline? Is there more room for further improvement or it's already at a satisfactory operating efficiency level?
I think as our CEO just mentioned that after we acquired DET, we have done a lot of things, including streamlined the production lines. And then we also improved factory automation level in Thailand. And also they have pretty good business mix economic scale in Q3. Hence, the margins were strong. And also because of the tariff issues after we acquired Delta Thailand, we also shifted some of the productions to Thailand. I think for those reasons, they all attributed to the stronger performance of Delta Thailand.
Assuming 5G smartphone consumes more power, will we become an opportunity for Delta?
Of course because we -- I mean, in Delta, we are a power management or power conversion as per -- whenever devices consume more powers, we will benefit from it. But if you look at a new generation smartphone of our -- or of the big smartphone maker, the 5G smartphones, they don't necessarily consume more power. But for -- but the power management is for sure much more complicated than the 4G phones. So as a result, we think that is good -- it will be a good opportunity for us if we could fulfill the customers' requirements.
So how is the 5G deployment progress? Do we see any speed up or slowdown in different regions? How do we expect progress in the next 1 to 2 years compared with 4G deployments? Can you compare 5G base station power consumption versus 4G?
I think we have more or less mentioned or answered some of these questions before. I think the demand or the major issue of 5G deployment -- I mean the 5G development right now is still the lack of killer applications. But I mean it doesn't mean that there are no -- killer applications now and they are not going to have in the future. But...
So what is the content value for 5G smartphone compared with 4G? Is there any further capacity expansion plan for passive components into 2021?
Well, it depends on the design of the phones. But as far as I know, the 5G smartphones are using relatively more components, passive components compared to 4G phones. But it could be a wide range. So the only thing we are sure is the increase of the component costs. So -- but as for the value, pricing will be another variable. In terms of the capacity, I think that we are almost running our full capacity right now. So given our expectation for the -- our expectation of future growth, we will continue to expand, but the pace will be subject to customers' demand.
So how do you expect the outlook for PC and server into 2021? Do you expect strong demand to continue?
I think this year, I mean the trend, the demand has picked up a lot. I think that in terms of the sustainability for this IT or PC and server demands, I think that the more important thing is not about the outlook or the demand for this kind of products this year, it's how we manage our inventories and production.
So by which I mean that if -- what if the demand is below the company's expectation for the next year, then how are you going to do with your inventories? So I think that the more important thing is not to relate to forecast. The demand is how about we manage well our inventories and productions.
So how is the IA growth outlook in 2021?
For IA, I think the China market has recovered since Q2. But outside of China, it is still suffering from the pandemic of coronavirus.
Okay. So what's the progress of current India planned constructions?
With the pandemic, the operation in India is still slow. We plan to complete our India factory construction in March of this year. As you know because of the pandemic in India, so there was -- and there is some delay in terms of the construction plan in India right now. So at this moment, we expect the plant to be completed in early next year. But because there are still -- I mean many cities in India still locking down, so we will see.
So the next question is regarding the M&A. So what's the potential M&A in the next stage? Will you focus more on the production side, diversification or getting into new products industry?
I think we continue to look for appropriate M&A targets and are in talks with some -- so after DET, I think we are not going to -- we are not looking at any production diversification. So I think the -- if there is any deal it's going to be for the technologies or customer access.
How do you see the impact from the pandemic in the European countries and the U.S.? What are the businesses of the company who are impacted the most?
I think that we both are in software and benefit from this -- the current situation of locking down in many cities and countries. So for example, for those -- like our ICT infrastructure or out of the Automation business. Because for those kind of businesses, you need to go to the sites and to implement the devices or investigate sites.
So that's the reason why those markets are slow, and those businesses are under some pressure and suffering right now. But on the other hand, we -- because of the lockdown of -- in many cities and regions, we also benefit from work-from-home change in our Power Electronics businesses.
So in terms of the production, geographic breakdown by China, Thailand and others, how will this change in 3 years?
I think it hasn't really changed since our last analyst meeting. China is still our main production site. And especially during the pandemic, and it's actually one of the most stable production site among all the factory sites.
So China still accounts for about 70% of our total production value. And DET accounts for about 20%, with the remaining about 10% in Taiwan, Slovakia and a few other places.
So how much impact came from the foreign exchange fluctuation in Q3?
So I mean we are largely naturally hedged. So the foreign exchange fluctuation had actually little impact on our gross margins.
So will we see a stronger sales momentum in 2021, thanks to further global demand recovery?
I think for your question, I can hardly forecast the things even for tomorrow. So how can I really forecast the things for next year? The only thing I can say is whatever things happen, I think we are doing our best to equip ourselves. And also we are preparing ourselves for whatever is going on.
So you still -- more improvement -- for further improvement for DET's -- for Delta Thailand's margins?
I think I just answered the questions just now. And of course, there is still some room for improvement.
So do you keep your CapEx guidance for 2020 on sched? And what's your CapEx guidance for the next year?
Yes. Other than India, where things are delayed, we continue to execute our expansion plans either for R&D or for capacity. I think this year's CapEx will pretty close to our budget plan. And for next year we don't have the summary yet, but most of the construction or capacity expansion plans are carryover. So the CapEx won't be significantly different from this year's.
So the next question is why the gross margin wasn't -- didn't really hit another record high as your OP margin or revenues did?
I think Rodney, just answered -- just reported, just talked about the reasons behind that because in Q2, we had some one-off incomes. And also the problem is it didn't really -- it wasn't really that different compared to Q2. So that's why Q3 -- the GP margin Q3 was slightly lower than Q2.
So how do you see the impact of locking down the cities?
I think this is a real landmark because if you lock down the cities, definitely, there are going to have some pretty negative impact on the economy. But if you don't -- I mean, locking down the cities, the COVID-19, the pandemic of COVID-19 may go worse.
So can you share with us now your dividend payout? Would it be the same, the net -- your dividend payout number of the next year will be the same this year?
I think it's still too early to say because we can't really answer this question at this moment. The dividend number has to be discussed and approved in the Board meeting in the next year. So I can't really answer the question at this moment.
Do you think that you are able to bond your different cooling products like your vapor chambers or heat pipes or your cooling fans together in order to provide better products or solutions for your customers?
Really subject to the design and the requirements of the customers. Of course, if we are able to provide more and more solutions or our products, we are happy to do so.
So do you have any idea of your market shares in data center market?
I think also it depends on how you fully define data centers. Because data centers, when we talk about the data centers, it's not only about the hyper data center. The hyperscale data center guys, many enterprises, they also are building up their data centers now. So it's quite hard to -- really hard to calculate or have an aggregate number of the market shares. But we do what we can do to achieve, like, higher market shares or like to gain more shares as possible.
So can you give us more color regarding your cooling fans business?
I think traditionally, we were selling a lot fans into those IT-related applications. But right now, nowadays, we are not only selling our cooling fans into those IT devices but also selling our fans into the auto market. And also we are selling our fans -- ventilation fans into the consumer market. So I think that, even though, for some of the products or for some of the device maybe for some of those kind of devices, there are some fan-less device. I think that there are so many applications that we have opportunity to penetrate into.
Okay. Do you think that you're able to get more shares in your telecom power business in the U.S.?
I think that we have actually pretty high market shares in the U.S. We have businesses with those main operators in the U.S., especially after we acquired Eltek.
So can you please give us more color of your solar inverter business?
In the U.S. -- because in the U.S., because of the global warming, I think that they are pretty aggressive on this kind of green energy development. So we actually have some good business and we are selling our solar inverters into the U.S. market as well.
So the final question is regarding to the passive components. When are you going to complete your factory in Taiwan, the southern part of Taiwan?
I think the construction is going to be completed in early next year and likely -- and really likely in the first quarter. So the construction is likely to be completed in the first quarter of next year. But we start to really able to produce more components, I think, it's probably like in the mid-2021.
So thank you, everyone, for coming, I mean, for joining this virtual investor conference. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]