Delta Electronics (Thailand) Public Company Limited (DELTA) Earnings Call Transcript

[Foreign Language] A very good morning to investors. Thank you for joining this Earning Calls for Delta Electronics Thailand for our third quarter results. May I introduce our top management who joined the session with us today. Firstly, Mr. Victor Cheng, Chief Executive Officer; Secondly, Ms. Nipaporn Jiarajareevong, Chief Financial Officer; and my name is Anchalee Jieratham from Investor Relations. [Foreign Language] Without further ado, I would like to pass on the presentation for -- [ to Victor ] to begin the session today.

[Foreign Language] I will start with the business and operation. First of all, the executive summary. Delta Thailand builds on a strong business momentum achieved in the first half of 2026 to delivering quarterly revenue of USD 2.281 billion and net profit of USD 232 million. Revenue increased by 38.1% year-over-year and increased 13.4% quarter-over-quarter, while net profit grew by 1.3% year-over-year and 24.8% quarter-over-quarter. Profitability has improved although supply constraint and inventory provisions remain a growing challenge. Amidst ongoing geopolitical and energy market uncertainty, global economic activities remained resilient during the last quarter. Despite inflationary pressure driven by elevated energy and production costs, investment momentum in AI-related industry outpaced broader market. Delta supply chain conditions improved during this quarter -- I mean, past quarter, while supply chain imbalance in certain AI-related components remain a challenge. Suppliers' diversification continue to strengthen, and inventory-related pressures are expected to gradually improve in the second half of the year. Flooding in late September, surrounding Delta manufacturing facility are very effectively managed through established business continuity and flood mitigation controls. Operations remain largely interrupted with no significant impact on business performance. And Delta's outlook for remainder of 2026 remain positive supported by continued customer demand, strong order visibility, and capacity expansion initiatives. Management remains focused on supply chain resilience, production ramp-up, and operational efficiency to support sustainable growth and shareholder value creation. Our business outlook, the macro conditions, the IMF outlook update projected the global GDP growth at 3.1% in 2026, slightly up from July forecast. Global inflation is expected at 4.7% in 2026 before moderating to 4.1% in 2027. While renewal trade tensions, including additional tariffs, and non-tariff barriers could further weakened global growth, the IMF raised Thailand's 2026 GDP growth forecast to 2.1% from a previous 1.9% based on October update. According to the Bank of Thailand's August report, private investment increased, particularly in machinery and equipment, while electronics export remain at a high level. KResearch's October 2026 report projects Thailand's PCB export to grow 64.6% in 2026, supported by AI and data center demand and investment in PCB manufacturing in Thailand to expand production capacity and meet orders. However, power, water, and permit constraints could delay data center projects and related PCB orders. The World Bank's October commodity market outlook indicates that energy price remained elevated amid geopolitical development, contributing to inflationary pressures and input cost volatility across global industries. Excuse me. Global data center electricity demand is projected to nearly double by 2030 as AI workload expands supporting continued investment in power and thermal management infrastructure and demand for Delta's data center energy management solutions. For Delta's business outlook for Thailand, Industrial Automation continued to grow in Q3 2026, with revenue increasing by 6% quarter-over-quarter and 4% year-over-year, supported by demand from Thailand, Vietnam, and Malaysia, particularly in PCB manufacturing and AI server assembly. Energy Infrastructure's Q3 2026 revenue decreased by 63% quarter-over-quarter due to project budget for Q3 have been delivered within Q1 and Q2. Despite the quality decline -- quarterly decline, revenue increased by nearly 166% year-over-year, supported by revenue contributions from photovoltaic inverter, battery energy storage system, what we call the BESS, and power conversion systems. In India, India recorded revenue growth of 14.6% quarter-over-quarter and 12% year-over-year in Q3 2026, supported by order wins across data center, energy infrastructure, industrial automation, including solar inverter orders, metro projects, and supply of power conditioning systems and DC/DC converters this for green hydrogen project as well. And revenue continued to see healthy growth despite continued challenges in pricing pressure and battery supply constraints. For Southeast Asia, Australia, and New Zealand region, the overall ICT business across Southeast Asia and Oceania delivered strong growth in Q3 2026, with revenue increased 15% quarter-over-quarter and 105% year-over-year, driven in market in Australia, Malaysia, and Singapore. Australia recorded strong revenue growth of nearly 100% year-over-year, supported by a large order for data center cooling system. However, revenue declined quarter-over-quarter due to lower data center orders. Revenue is expected to remain healthy in Q4. For Europe, Industrial & Medical recorded revenue growth of nearly 19% quarter-over-quarter and 46% year-over-year in Q3, supported by strong demand from existing customers, market share gains, and strategic customer partnerships. Automotive business revenue decreased slightly quarter-over-quarter. European battery EV and the plug-in hybrid EV production and onboard power supply demand across EV types and OEM remain stable but [ subdued ]. Government incentive and charging infrastructure continue to support EV demand. The development of new onboard power unit for major German OEMs is on track. Some of the Awards & Recognitions. Delta Electronics Thailand earned top rankings in 4 categories that Alpha Southeast Asia's 16th Annual Institutional Investor Award placing first the Most Organized Investor Relations, Best Senior Management IR support, second Most Consistent Dividend Policy and fifth in Strongest Adherence To Corporate Governance. These honors recognize company's commitment to investors, engagement, shareholder value, and transparent governance. Delta Electronics Thailand has been ranked 9th among Thailand's 50 Most Valuable Brands in Brand Finance Thailand 50 2026 report, climbing from 14th place in the previous year. The company's brand value increased by nearly 56% year-on-year to USD 1.49 billion, marking the highest brand value within the electronics sector in Thailand. Excuse me. And then Delta Electronics Thailand announced that it has been included in the FTSE4Good Index Series. This marks the eighth time in Delta Thailand has been included in this global ESG benchmark. Created by global index and data provider FTSE Russell, the FTSE4Good Index Series is designed to measure the performance of companies demonstrating strong environmental, social governance practice. On the operations side for Sustainable Development. Delta Electronics Thailand signed an MoU with Industrial Estate Authority of Thailand, IEAT, on August 28, 2026, to advance the IEAT Samutprakan Sandbox, connecting education with employment and supporting workforce development. This initiative brings together government agencies, educational institutions, industry, and communities surrounding Bangpoo Industrial Estate to help local use develop skills and explore future career opportunities. The collaboration aims to expand internship and company visit opportunities for student in Samut Prakan alongside knowledge-sharing and curriculum development to align education with industry needs. Delta signed a letter of intent with Kasetsart University and King Mongkut's University of Technology Thonburi to support talent development and strengthen collaboration between higher education and industry. And on September of 2026, Delta Electronics Thailand Electronics Thailand and Department of Industrial Promotion DIPROM marked the 11th year of Delta DIPROM Angel Fund awarding THB 5 million to 10 Thai startup companies. The selective startup offer technologies, including AI-powered crop monitoring, smart dairy cow health monitoring, and plant tissue culture to improve productivity and address business needs. The program combines funding, industrial expertise, business matching, and proof of concept tests to help startup bring their technology to market. The 2026 program is expected to generate more than THB 150 million in economic values and create nearly 100 jobs, supporting on growing innovation in Thailand's long-term competitiveness. On some of the regional development. Delta Thailand opened a new office in Johor Bahru on July 28, '26, Malaysia, expanding its Malaysian presence beyond the Petaling Jaya and Penang to strengthen support for customers and partners in the southern economic corridor. Located in the Southern Industrial and Logistic Clusters, Iskandar Puteri, the office enable closer engagement with customers across the Johor-Singapore economic corridor. The expansion supports growing investment in data centers, advanced manufacturing, and digital infrastructure through Delta's integrated power, cooling, and automation solutions. On the production side, Delta Thailand maintained strong production growth in Q3 2026, with production value increased by 60% year-over-year and exceeding budget by 16%. The ramp-up of newly launched automation production system at the new plant increased output for ongoing lean improvement initiatives enhance operational efficiency. Delta India's production performance in Q3 2026 was slightly below budget. The Rudrapur and Gurgaon sites outperformed budget by 21%, supported by demand for data center cooling, solutions, and power distribution unit, partially offsetting lower output at the Krishnagiri due to component supply constraints. And now I pass to our CFO for Financial.

[Foreign Language]

[Foreign Language] Starting over with the first question. Has management see any signs of slowing down of the demand from our key customers. And what is the order of visibility and the demand outlook for 2027?

Yes. In essence, we haven't seen any order slowdown. We have roughly 4 years of visibility, so we can see all the way to at least Q3 of 2027 with some forecast indication. But overall, I think the business for data center, especially AI-related data center infrastructure, is strong and healthy. But due to the fast change of technologies, now we are already at Vera Rubin 200 series. And the overall characteristics of power is changing. So we do see dynamics changing between different power solution adaptation. And also another trend is some of the ASIC-related system has surfaced, and it also commence highly different power design. So suffice to say, business is good by the mixture within these many, many projects do change from time to time. And that explains part of the reason why we have inventory buildup is we acquired material in advance to meet this demand. Some programs suddenly get slowed down a little bit while others get pulled up. So we have to prepare or expedite material. And therefore, right now, the material inventory situation is at a high level today.

[Foreign Language] The second part of this question, how is the top-up tax will impact our -- sorry, our net profits on an ongoing basis?

Yes. So the top-up tax, 15%, does drive our tax liability to that range with some items that's deductible, but still is in the 13% to 15% range right now. Now we have fully accrued tax liability now, but also actively engaged with various government ministry to understand the detail of QRTC to see what sort of tax incentive we can obtain when these items are confirmed and then pass through legislation.

[Foreign Language] Last year, we have faced this legal disputes related to the patent and there has been corresponding legal expenses involved. Why the company is still let this kind of legal dispute to happen and recur again?

Okay. All this legal incident mainly is initiated by the U.S. company, Vicor. Now, Vicor has been in the DC/DC tower business for over of 20 or 30 years, has a rich portfolio of intellectual property and some of them is quite fundamental. So last year, we resolved the dispute through negotiation. Now they have come to U.S. International Trade Commission again to claim other pattern infringement and this is not only Delta, but some other power product maker as well. So we are actively defending against these claims. And also, we have founders sued Vicor on certain IP infringement. But to be honest, Vicor, in terms of size, is large, but in terms of IP, property has many. So it is a little bit not balanced in terms of if we have to exchange IP right because the revenue that we can -- or the compensation we can get from Vicor if we win is comparatively small if they win against our portfolio. So anyhow, we are actively defending these cases against us right now.

[Foreign Language] He actually provides this English translation. If you like to understand the reasons behind the inventory write-down in this case, I think we refer to inventory provision, not the fully written off assets. And then given the raw material costs that increased company have built up inventory to support production, why did the company still need to recognize this inventory provision? What were the main factors driving this adjustment?

Yes. So I have explained previously a little bit because of various programs within the power portfolio. Some of the program gets a little delayed. Some of the program gets pulled up. Overall business is not a problem, but the mixture we didn't -- do see some changes. And we do not write down these materials. We've simply made accruement of material provision. As a material say, age beyond 90 days, we will put -- take a partial reserve for the valuation impairment. But when products -- production of these products do resume, then we will reverse that. So overall, the material level is high, and some of them start going into a little bit of aging situation. So we have taken accrual for these materials. We fully expect to resolve this over time as they will all go into production. This customer are liable for this material.

[Foreign Language] Next question under the newly proposed QRTC framework, does management expect any material tax credit that could offset part of the THB 7.1 billion Pillar 2 tax liability? Assuming QRTC becomes available, what percentage of the current Pillar 2 burden could potentially be recover or offset?

I have CFO to be -- answer this.

Okay. [Foreign Language]

So this QRTC is currently under process, and we are in active engagement with the Ministry of Finance and Board of Investment. They still be unclear in terms of any [ mitigation ] measures from the government and also the corresponding legislation process. Everything is kind of pending, and we are closely monitoring the situation right now. [Foreign Language] Currently have Delta engaged in any business portfolio related to photonics technology?

Straight answers is no.

[Foreign Language] This is also related to inventory write-down. Investor would like to confirm that the raw materials that we have procured and -- in a large amount, this will be sort of trigger some aging days beyond 90 days and that led to the inventory write-down, whether it's right or wrong. And then this is going to continuously impact our financial statement in the subsequent quarters.

Yes. It has -- it will influence our performance in subsequent quarters. As I mentioned previously, these accrued inventory do gets to be used for any project and production resumed. They will be reversed. So at that time, it will be sort of -- not sort of, it's a benefit to us at that time. Right now, as we take accrual for various types of material for various projects. Of course, right now, the provision started appearing and seems to be quite significant at this moment in time.