© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
So, hello, everyone. Welcome to Delta Fourth quarter 2017 Investor Conference. So as usual, we will start right now. And firstly, we will have our IR manager, Rodney, to report the financial numbers of Q4 to you. And after that, we will have our Q&A session, and you can raise your questions in that fashion.
Okay. Thank you for coming today. So before we start, I need to remind you, again, that all the financial numbers are reported by -- based on IFRS, and the consolidated numbers have been audited by CPA as well.
So the Q4 revenue was TWD 61.4 billion, up 3% Q-o-Q and 8% Y-o-Y, where about 1% to 2% was coming from consolidation of VIVOTEK since last year September. So sequentially, we saw a seasonal decline in Power Electronics, while Automation and Infrastructure were doing better in Q4.
Thanks to the consolidation of VIVOTEK and the better growth from telecom power business. Though we saw a seasonal decline in Power Electronics year-on-year, we had a little bit increase in this segment. Other than that, both Automation and Infrastructure were growing nicely compared to a year ago again, which was partially related to the contribution of VIVOTEK. And therefore, compared to a year ago, the revenue mix was shifting more to Automation and Infrastructure.
Gross profit in Q4 was 50 -- TWD 15.6 billion up 2% Q-o-Q and 7% year-on-year. While the third quarter, gross margin -- gross profit margin was still under some cost pressure such as direct labor costs.
Year-on-year, we have 4% increase in R&D expenses, which was moderate. Compared to the previous quarter, R&D expenses as a percentage of sales decreased to 7.3% from 7.5% in Q3 and a year ago. SG&A as percentage of sales was down to 10.3% from 10.4% in Q3 and remained flattish from a year ago.
Though the absolute number of expenses increased by 6% from a year ago, the expenses ratio was down to 17.6% from previous quarter because of the better scale. So the operating profit was up 8% Y-o-Y and 6% Q-o-Q. Ratio-wise, OP margin in Q4 increased to 9.4% from 9.1% in Q3 and was above flattish from a year ago.
Here we provide some breakdown of operating profit by sector for your reference. Both Automation and Infrastructure are making significant profit improvement from a year ago, partially because of the consolidation of VIVOTEK, which is under Building Automation segment.
In Q4, we had TWD 640 million non-operating profit. The decrease in orders mainly came from the write-down of Swissray investment. We had TWD 6.4 billion profit before tax, which was down 2% year-on-year and 8% Q-o-Q due to the drop off nonoperating profit. Our EBITDA in Q4 was TWD 9.3 billion, which was up 3% year-on-year, but down 3% Q-o-Q.
Q4 tax expense was about TWD 1.5 billion, representing a 24% effective tax rate. The increase of non-controlling interest was also from the consolidation of VIVOTEK. So the net profit after tax in Q4 was TWD 4.8 billion, down 4% Y-o-Y and 13% Q-o-Q.
We used the current number of 2.6 billion outstanding shares to calculate a quarterly EPS, which was TWD 1.84 in Q4.
So now we'll have a look of the full year result of 2017. So 2017 revenues was TWD 223.6 billion, up 4% from a year ago. If we look at the sales breakdown by segment, year-on-year, we had flattish growth in Automation, around 22%, which was related to the strong growth of IA, also the consolidation of VIVOTEK since Q4.
So the gross profit was TWD 60.8 billion, and the gross profit margin was 27.2%.
Other than the speedy price erosion in IT power supply, the increased direct labor cost also put extra pressure on our gross profit margin.
R&D expenses as a percentage of revenues increased to 7.5% in 2017 from 7.2% a year ago. SG&A as a percentage of sales increased to 10.9% from 10.8% a year ago. So the total OpEx ratio increased to 18.3% from 18.0% from a year ago, which represents a 6% increase year-on-year.
Operating profit in 2017 was TWD 19.8 billion, and operating margin declined to 8.8% from 9.7% from a year ago.
So again, we provide operating profit readout for the reference. So in 2017, we had about TWD 4 billion non-operating profit, which was within the normal range for us. So we had TWD 23.8 billion pretax profit, which was down 4% from a year ago.
The full year EBITDA number was above flattish. The tax expense in 2017 was above TWD 88 billion, representing 21% effective tax rate. So the net profit after tax in 2017 was TWD 18.4 billion, down 2% year-on-year. And therefore, the EPS for 2017 was TWD 7.08. So the proposed cash dividend per share was TWD 5 based on the TWD 7.08, EPS to payout ratio is about 71%.
So if anyone has any questions, please ask right now.
Okay. So did you consolidate the [ whole overhead ] number of VIVOTEK?
Yes. We did.
I noticed you still have some more interim pressure on your gross profit margin. But actually you in the second half of last year, your OP margin was improved a little bit, so can you share us about some outlook and some market outlook by segment?
So let me give you some reasons why Power -- why our Power business in the first half last year was doing little bit weaker than the second half. Actually, in the first half of last year, some of our competitors, they were doing price -- doing a price deflate, which means they compete with lower price. So there was quite heavy price erosion on the Power business, especially in the IT space. But not to mention that making a loss, we don't -- we didn't even want to lower our price and sacrifice our gross margin just in order to get business orders. So that's why our business -- IT -- Power business in the first half was a little bit weak compared to the second half.
So how did you see the business trend this year, especially for the first half? And is the [ voucher ] operating margin sustainable in this year?
I see -- I think price reduction -- the pressure from pricing reduction is still there. And meanwhile, the material cost pressure is also there. So that is also the part we will take up cautious look at this year for the material price. But the good thing is we have a bigger scale compared to many other players and competitors, but we still need to do a better control on the material price. And also, the inflation of direct labor cost was also putting a lot of pressure on us. Although, we started implementing our factory Automation project since 2 years ago, but it is not an overnight project. So in conclusion, our plan or our hope is to maintain the current OP margin.
So can you give us more color on the -- on your Automation business especially for the first quarter this year?
So actually, you need to separate Automation business into 2 segments. One is Industrial Automation and the other one is Building Automation. And Industrial Automation is the bigger part within the segment compared to the Building Automation business. We still believe that the factory automation is still the trend. And implementing the factory automation is not only for solving the problem of labor cost inflation also that we think the quality can be better after we implement automation. So therefore, we still believe that the factory automation or so called industry automation is still the trend at least for the next few years. And also, we will -- at the same time we will level up ourselves from a purely component supplier to a solution provider. And I can assure you of good news that recently we just got a project from a Japanese motor company, and we will be doing production line factory automation for their -- development of their production line. And that is quite encouraging news because in the past, the Japanese -- normally, the Japanese companies, they wouldn't outsource this kind of project to a Taiwanese company. So we believe that we are gradually leveling up ourselves to become solution provider.
Can you give us like your strategy for this year?
So first of all that we will continue to shift our focus from the IT to the industrial and medical and home appliance. So we will diversify our power supply business to other applications. And the standard one will be the auto-related business. Auto-related business will definitely become one of our focus and becoming more and more important for us going forward. And for these reasons, I can also show you some of encourage news. So one of the biggest makers -- carmakers in Europe, they started using our [ traction ] motors for a while and also because I just came back from the U.S. and one of the biggest carmakers in the U.S. they will start implementing and using our [ traction ] motor as well. And other than this kind of on-board products in the car, the power-related products or solutions is also one of our [ standard ] focus. For example, right now if you only have like 1,000 electric vehicles on the road, that wouldn't make so much impact on the grid. But in the future, if you have like 10,000 or even more than that EV cars on the road that will make some pressure on the power grid. So when we are talking about EV charges, it is not only about a EV charger alone, it's about the whole infrastructure of the power grid. So that's why we have our new segment called Energy Infrastructure. So we will also be using our competency to develop our business such as on-board chargers and DC/DC converters. So for the auto-related business, we are not going to make likely a whole car, but we will make some power-related products as well as some critical powertrain products such as the [ traction ] motors and [ traction ] inverters in the future.
So thank you for sharing us the auto-related business. But can you also give us some detail regarding the Industrial Automation business?
Okay. I will have our CEO to answer your -- the questions regarding Industrial Automation.
I would like to give you more detail on our auto-related business. Actually, the nature of the auto market is quite different from the legacy -- like our legacy business, the IT-related or PC-related market. For example, in the past, if you were getting in touch with IT customers, it was easy that if the customer thought your price was higher than your competitors, you will get replaced because of that. But in auto market, it's totally another story and another scenario. Once you break into the auto supply chain, it's very difficult for anyone to replace you because it takes you like very long time, at least 3 to 5 years, to get a qualification. Okay, so for the IA business, actually, our focus is to do the production automation, especially for the consumer electronics vertical. We can be using our components -- the data from -- collecting from our components such as our PLC, our machine intelligence. And we can use those kind of data, we can analyze that. And use -- by using that, we can -- we are able to do the automation for the whole production -- for whole production line. So because we are doing this production line automation in our factories, so we are also -- we also welcome our customers to pay a visit to our factories. And, we are also doing the consulting -- like the project consulting for them. So if they are happy with automation progress in our own factories, we can do the same thing for them. And our model line factory is, actually, not just model by doing demonstrating or showcasing to our customers. Actually, it is doing the real production of our own products. So in the past, we used to have like, say, 40 people or 40 labor workers in a line, but right now, it's about like 5 people in a line. And our goal -- our target is to reduce to 3 people -- 3 workers in 1 production line. So now all our customers are welcome to pay a visit to our factories. You are also welcome to pay a visit to our factory -- factories. So if you would like to pay a visit to our factories, please reach Rodney. He will help to arrange that for you.
Can you give us some update on Eltek? And [indiscernible] and synergy after consolidating and acquiring VIVOTEK.
Firstly, the VIVOTEK is not under Industrial Automation business, which is within the Building Automation segment.
It is okay then, can you give -- can you just give me or give us some update on Eltek?
Eltek right now is with our Telecom business under Infrastructure, ICT Infrastructure segment. I think Eltek currently is still on track to growth and which is in line our expectation, okay. So maybe let me show you some updates regarding Eltek business. So firstly, when we were doing acquisition of Eltek, our goal is to improve their OP margin originally about 4% to 5% to 10% within 3 years. And in the last quarter -- the fourth quarter of last year, it was about -- the OP margin of Eltek was about 8%. I know that was still a little bit below our expectation, but I think we have done something -- quite a lot of things to improve their OP margins firstly, that we have to streamlined their operation. For example, they used to have over 50 offices in over 40 countries. So we made some efforts to streamline their offices. And also, we have done some cross selling because their major client type is actually the operators that we also have other business or other product solutions for operators. So by doing that, we have improved their OP margin a little bit, though, which was still below our expectation.
So my question is -- actually, I'm not sure about the market growth -- organic market growth of telecom market. Does the growth of your telecom business or your -- or Eltek in line with the market growth?
Actually, because it is the downside of the telecom market. People are expecting the next generation of telecom, which is 5G. So I think the market growth currently is about only 2% to 3% a year.
Okay. Then can you share me like the synergy between VIVOTEK and Building Automation?
Yes, of course. Actually, Building Automation is also a pretty new business to Delta. We started this business from NBD, which is new business division. We started this business by doing the system integration because by doing that, we can learn some knowledge and to manual [ haul ] in this market and this business. And after we had doing that by a few years, we acquired LOYTEC and Delta Control. And those 2 companies, they have their own products. So let me give you an example on some computing automation. Actually, we focus -- we only focus on commercial buildings right now, which are the shopping malls, offices and hospitals. Traditionally, we -- people need to control their lights and air conditioning whenever there is an event. For example, right now, we are holding this investor conference. So we need to turn up the light and so on and so forth. But when you have the Building Automation, they actually -- those kind of systems, they can be automatically controlled. By using or implementing this Building Automation, in the future then when the sensor is monitoring the number, changing the -- in people -- like, for example, in the office, when some people are coming in and out, then the sensors can automatically do sense that. And the -- so the equipments, they can automatically adjust the humidity, the temperature, also the air quality. So the challenge right now, I would say, is to integrate the whole systems. For example, the -- we -- right now, we have the automation of lighting system, automation of surveillance system. By -- after acquire VIVOTEK, also, we have the energy automation or energy monitoring system, but the thing is we need to integrate those systems. Once we can successfully integrate all these systems, we can call it a real automatic building.
Can you give us some update and also the outlook for this year of the Cyntec business?
Okay. The major obligation of Cyntec or our passive component business was actually the smartphone-related applications as well as the tablet and notebooks. But starting from 3 years ago, we also sensed that we can't rely on the growth of smartphone market as well as the IT market. So we were also doing the same thing that we diversified this business to other applications. One of the main application is the auto market, then you will see the cars using more and more passive components going forward.
So I have a question regarding the financial numbers. I know that your OpEx ratio was creeping higher to 18% last year. So do you have a guidance or target for your OpEx ratio?
I think the main reason for the higher OpEx ratio is largely related to the business model changes. For example, in the past, we also invested quite a lot into R&D. But the -- so the key reasons for the higher OpEx ratio was actually the business model or the business nature change. So the business model is also highly related to the cost structure. For example, because right now, we are doing more and more business for the auto market and the testing equipments and devices for cars are actually very pricey, very, very expensive. And also, the certification for the testing equipments are also very expensive. And also, it's nature that -- it's natural that your sales expenses would be higher while you are entering into the solution business. For example, traditionally, when we were still in the ODM business, actually, all you need -- you only needed a few people or a handful of people you can handle, like million dollars -- U.S. dollars business. But right now, because we are transforming ourselves into a solution provider, then you need more FAE, more salespeople to serve your clients. You also need industry experts. Those people, they have profound knowledge of the industries of our clients. So that's not because we invest too much in the R&D or ourselves, people. That's because the -- changing our business model. And also, I would like to give you some idea because one of the lower -- one of the reason related to our lower OP margin right now is because we lack of scale in some new business, such as our Traction motor business. But even with the smaller scale of those kind of new business -- but we still believe that, that is something that we have to do. We have to do the business just right now. Otherwise, you didn't have the growth in the future.
To my knowledge, as I understand the first quarter, usually, would be the low season of the -- within the full year, but I would like to know whether the first quarter of this year would be better than last year.
Okay. You mentioned why the revenue numbers of February was actually lower than February last year. Actually, that's because of the Chinese New Year was in February this year, but the Chinese New Year was in January last year. So in the Chinese New Year, actually, people had, like, fewer working days. So that's why we saw it in the lower sales numbers.
So can you give us the idea about the growth driver for this year?
Okay. I think the trend is actually quite clear. If you can spread out the business by segments for a few years, you will see that our focus or the growth driver would definitely be the Automation segment as well as the Infrastructure segment.
Can you give us the sales contribution of your auto-related business? And also, for that business or for that market, are we the first tier supplier or the second tier supplier?
Okay. As I just mentioned, that any moment, auto -- our auto-related business is still quite tiny for us. So I would say that sales contribution compared to our whole business is quite insignificant. But I think for this business, you need to look at the incremental sales revenues and also the potential of this business. As far as I know, all of those carmakers, the ODM makers, they are actually quite aggressive on their plan of expansion themselves to the EV markets. So -- because whether you like it or not, but EV will definitely be the future trend in the auto market. In some countries, you have to be a whole EV market before 2025. In Taiwan, we need to become a full EV car country before 2040. But anyway, you -- it would definitely be the trend in the future. And I think our opportunity is traditionally, the cars -- the supply chain, we had no chance and no -- 0 opportunity getting into their supply chain. But right now, actually, the cars are becoming more and more like a PC or a mobile PC because they are adopting more and more electric components. So that's our opportunity there. So for our onboard charger business, we are the Tier 1 supplier. We do the business directly with those carmakers. So is not because of the -- it's not because of the chance of EV market. We had no opportunity and no strength in the mechanical car industries. And even you may have a chance doing business with those mechanical guys, I mean, in the past, you can -- you couldn't make any profit on that.
As far as I know that because you feel -- you are feeling some pressure on your traditional legacy business, which is your IT power supply. So can I know how much percentage of the IT power supply within your power supply business?
So the sales percentage of PC and notebook power supply is about 10% right now, and server accounts for another 4% to 5% of total sales. So the mechanical power and industrial power accounts for less than 1%, but we still have some powers business for home appliance and some peripheral.
Can you give me the OP margin trend of your Automation business? And also, do you have any target for OP margin trend -- OP margin of the Automation segment?
The margin of Industrial Automation will be higher compared to Building Automation.
Why the reason that OP margin of IA business is higher than Building Automation?
Because we have almost the majority of components in IA business. On the other hand, if we want to be a solution provider in Building Automation space, then we still need to buy a lot of components. So the margin of IA would definitely be higher than Building Automation.
Also, what about the growth rate of those 2 business?
I think maybe Building Automation will be higher because the scale is -- the base of scale is smaller compared to our IA business. For the Building Automation business, actually, I tend to think that we are still on the learning curve because we still need to know what we lack, like, say, the components or solutions in order to be a real solution provider. So from buying all those components and having those solutions and integrate them, all of the systems, I think it's still a long way to go.
Do we have some similar products like, let's say, the controllers or the sensors in our IA business and in the Building Automation business? But why we can't just share them in those 2 platforms?
The reason is actually, our target or our focus for Building Automation business right now is commercial buildings. So for commercial buildings, you need to make those kind of equipment or devices very simple and user-friendly. But we think the factories -- those factory managers, they are able to manage the more sophisticated devices. So that's why we can't just simply share the products within -- among those 2 business, but we do have some technology which they can share with each other. Okay. Maybe just 2 more questions. Okay. So I will -- I'm going to give you some guidance regarding our CapEx especially in the factory expansion plan space. So actually, we are going to retrofit our -- one of our office building in Taiwan, and we are going to run another office building in Taichung for our robot arm business.
So can you also give me some detail regarding your R&D focus? For example, are you going to development like new models in your robotic arms or your machine vision?
My answer will be like I think it's everything actually. Okay, actually, we just added a lab with one university in Taiwan. And there are 2 reasons for doing that. One is we can realize the newest or latest ideas from the college. And another reason is by doing that, we can attract the students, good students from that university. And we can also have more -- attract more talents from the good universities by doing that.
So do you expect your OpEx ratio creeping higher this year? As far as I know, you just announced your new bonus plan for your employees. Can you give me some detail?
Yes. Actually, in the past few years, we normally distribute our bonuses to employee in August. But some of our employees, they think that actually, we can separate the bonus. We can distribute the bonus in the earlier days, say, like in April. And after that, we can do it again in August. Actually, the total amount of distribute is the same. The formula of our bonus, employee bonus is just -- is the same. We just do it in 2 different months. And that is also good for us for recurring our -- retaining our talent. Okay, so for Energy Infrastructure business, other than the EV chargers, also -- actually, we also have solar inverters and wind power products for that business. And in the future, if the Taiwan government decide to be more offshore wind power generators, actually, we believe that will also be our opportunity because they [Audio Gap]