Welcome to Delta Q1 2020 investor conference. In light of the spread of COVID-19, this conference will be a live webcast only. 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.
Thank you for attending this live webcast. All the financial numbers are reported based on IFRS, and the consolidating numbers have been reviewed by CPA. 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 the new high at 22.9%, with a sluggish demand resulted 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 our 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, networking display, and display.
Sequentially, we had some seasonal decline and profit contraction in these three categories. 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 non-operating 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., d own 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 a 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. The EPS in Q1 was TWD 0.8.
Now you may raise your questions online.
The first question is, can you please share the outlook for each segment in Q2?
At this moment, we have already passed 1/3 of the second quarter, so we have higher visibility about the second quarter. In terms of the outlook for second quarter, we think it's much better than Q1. There was some abnormal factors in Q1, such as the impact from COVID-19. In terms of the labor's return rate, actually, we have nearly achieved almost 100% by now. In order to maintain the normal operations in the factories, we need to prepare our workers and laborers one mask for each day. We actually build up a production line for making this medical mask.
Actually, the capacity for this mask, we can make around 50,000 masks one day. Some of our businesses are doing okay or doing well, including our cooling fan business and passives business. Some of the segments which are still highly uncertain, in terms of the outlook, for example, our EV solution business. 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.
Regarding the outlook for EV solutions, is still relatively uncertain. 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, especially America, are locked down at this moment, so there are not so much things we can do at this moment.
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. That is something that is still too early to say. 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.
Because many of these components are actually made or produced in Malaysia and Philippines, those countries which still applies for these lockdown policies. 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. It's still really very subject to the bargaining power of each company, because we are the main customer and the much bigger customer for many of our suppliers. Compared to many of other peers that we believe that we might have better bargaining power.
The demand is one thing, and manufacturing is another thing. Still another issue that many people may know that is about logistics. 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.
Generally speaking, within this Q2, the demand in Q2 and all of Q2 is going to be better than the first quarter, though we're still not sure about the outlook for Q3 and Q4. In terms of the impact of COVID-19, though, I believe that our employees and the company have already done the best we can do. I think currently, we are still doing okay in terms of the management of this COVID-19 event.
Despite it. Can you talk about the progress in Delta Thailand?
I think that after acquire or integrate for nearly one year, that we think that everything's on track right now.
The third question is, which segments you believe are stronger than expectation, and which ones are below expectations?
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.
How is the demand for power chip business, given the smartphone market is actually quite slow now?
I think the expectations and viewpoints for the smartphone demand are quite divergent. Some people there believe that there is going to see some growth for the smartphone demand, but some people are relatively passive. In terms of our passive business, I think that we are doing okay.
Do you have any visibility for notebook components such as powers and fans? What is the outlook for second half?
As I just mentioned, in Q1, actually, we got some urgent orders for these IT components, and not so many companies are able to digest these kind of urgent orders because they don't have enough capacity and operation capability. For the outlook, this kind of outlook or demand in the second half, which is really subject to the development of COVID-19. In general, I believe this COVID-19 event has changed the trend or the style of working pretty significantly.
Can you give us more color about your IA business in China?
We do see some more retail recovery in the China IA market. Also interesting. Interestingly, there are some unique verticals that were not in the market or which were not in demand that much before this COVID-19, which are the mask production devices.
Can you talk about the competition landscape in the Chinese IA market?
The competition is always there, it's really hard to say whether there is any significant change in terms of the competition landscape. We keep doing the things we believe that is the right thing to do. For now, we didn't really see any significant change in terms of the competition landscape for now.
When can we expect to see the breakeven of your EV business?
Just as we just mentioned, many of those global OEMs, they actually locked down their factories at this moment. Even there are some communities, they don't support those OEMs to go back to work, in order to protect the health of the workers. The automotive business is really highly subjected to this COVID-19, because if you look at the pictures of the photos in many major cities in the U.S. right now, there are actually no cars on the road. It's hard to forecast before this COVID-19 settles.
Can you share the CapEx plan for this year?
We keep our CapEx plan unchanged for this year.
In terms of our factories in India, especially for the production base or production sites in Southern India, because the COVID-19 is more severe in those areas. Currently, there are not so many workers in our factories in Southern India.
Can you give us more details about the financial numbers for the second quarter?
Sorry, we are not able to share the details or this kind of financial forecast for the future.
How should we think about the expenses for the second quarter and for this year?
Many people are concerned about our expenses, especially our SG&A expenses. I have to remind you that when you look at our SG&A expenses, which includes amortizations from our previous acquisitions. Also, if you look at the 22.9% expense ratio. There are actually two reasons. One is, of course, because of the lack of economic scale in Q1. The second reason is, actually, when you look at the expenses in Q1 and compare it to a year ago, which is not apple-to-apple, because you still need to consider the extra amortization from the acquisition of DET.
To answer your question about is there any impact from the historical low petrol price. 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. Even like the petrol price is quite low at this moment. In many European countries, they actually have these policies and standards for the carbon emission rate. The trend is still there. That is not going to be so much different.
Would there be an impact on your gross margin when there is some pricing inflation of components in the market? Is it possible to transfer that pressure or cost to your customers?
Actually, the passive components are not a big part of our materials. Also many or most suppliers, we have the pretty long-term commitment and relationship with our suppliers. This also is the same case for our customer, because we also have pretty long-term relationship with our customers. We don't want to ruin that relationship to pass through this kind of pressure just right away to our customers. We will try to control the cost.
Have you seen any of your customers moving out their factories out of China?
We haven't seen this like a very big movement of such moving out of China trend. 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. In the future, we believe the trend is going to be more diverse in terms of the production bases. It's not going to be so concentrated as the old time.
What is 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?
Our CapEx number, as I just said earlier and in the previous quarter meeting, that we have no change on our CapEx plan for now. We will keep that number.
In terms of Factory Automation, it's actually a complicated or sophisticated process. For the new products, of course, we can try to achieve as automatic as possible. For some of the old products or old models for our customers, if our customers don't allow us to make some change on the production process, then actually, we don't have so much things we can do on this. Anyways, we always keep improving the automation level of our factories.
The Chinese government has officially defined New Infrastructure. Is your IA business going to benefit from this? Can it offset the weakness of European and American markets? Any pricing pressure on your IA business?
Yes, of course, I think that's like Telecom Power business or IA business is likely to benefit from this kind of Infrastructure budgets or plans.
Why Delta Networks has been underperforming the peers for a while? Do you have any improvement plans? When can we see the recovery?
Tariffs. Partially, the underperformance of Delta Networks, partially because of the tariff issues in late last year. Because of that, we actually moved our production lines from China to Thailand during this period. There are some, or there were some hiccups during this moving period and progress. I think that is a learning curve. Going forward, I believe that this is going to be better.
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 have been infected, how to maintain normal operations in your offices and factories?
Just right after the Chinese New Year, then when everyone was back to the office, we right away immediately set up a dedicated team for preventing this COVID-19. We got two employees in New Jersey which were infected, and two in Spain were infected. For the rest, we don't have any other employees have been infected.
Do you see any postponed in the 5G base station construction or implementation because of COVID-19?
Yes, we do see some postponed because many cities are locked down at this moment.
How should we estimate the dollar contents of power chips in the next generation smartphones? Is it going to increase by a lot?
In terms of 5G smartphones, of course, there will be more components within one phone in terms of volumes. As our Chairman just mentioned, we do see some response in terms of the 5G Infrastructure construction. If you ask me, when we will see more 5G smartphones, that is not our say. That is subject to our customers. We are ready here, but we still need to wait for the calls from our customers.
Can we say that we have already seen the worst case of Delta Thailand?
Yeah, because we have been doing this integration for nearly one year, we think that in terms of the manufacturing, it's going to be better and better. Right now, something is on our minds about the demand instead of the manufacturing capability. Demand is something out of our control. If you ask me about the manufacturing capability in Delta Thailand, I think that we are doing much better now.
Okay, it seems that the higher GP margin businesses such as IA, Telecom Power 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, why is the reason?
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.
Can you share the numbers or details about the capacity in China and outside of China?
The capacity in China is about 67%-68%.
Can we expect the gross margin of Q2 is going to be better than Q1 and a year ago?
Yes. If you ask me, the gross margin in Q2, it might be better than Q1.
Have you seen any shortage in electronic components?
There are actually many different kinds of electronic components, including active types and passive types. At the beginning, that's something we were more worried about as the mechanical components. Later on, we were worried about the packaging materials. It seems to be okay. At this moment so far, the only thing we didn't really encounter any severe or serious problems in terms of the shortage. If you ask me about the visibility or the outlook for Q3, I think it's still way too early to comment.
Any targets for this year's and next year's GP margin and OP margin? Is it possible to see your OP margin going back to 10% level?
Every year, we do have this kind of internal targets for the profitability. It's still really subject to the demand and the macro environment. If you ask me about the OP margin, then 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. That is one of the main reasons.
Can you talk about the inventory turnover cycle in Q2 and Q3?
I think that if we expect the normal seasonality in Q2 and Q3, usually expect the similar inventory turnover rate as neutral.
Can you talk about your main products within your EV solution business?
I think the main product is still On-board Charger and some power management products.
Is there any change on this year's budget?
Yes, we just done our Board meeting yesterday, so we didn't have any change. We keep this year's budget unchanged.
Do you see any size of CapEx cutting from data center guys?
I think that because of this, the recent work from home trend, more and more people 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. 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. I can say that in the near term, that we didn't see that. I think that we have answered all the questions. We still have a little time, so if you still have any other questions, we will still be here. You can just raise your questions online.
Do you see any signs of more demand from the cloud service, especially in China?
Yes, I think that is not only happening in China. It is actually happening in many countries, including European countries and markets. We actually have some projects with this kind of cloud service companies, and the product or solution we provided to them is our data center solutions. Our expertise in our data center solution is energy management. We believe that by taking advantage of our expertise, we help them to save a lot of power consumption energy.
Are you still going to increase your capacity in the regions or areas outside of China in the next two years?
As I just mentioned, at this moment, the capacity in China is already much lower compared to two years ago. Right now the capacity in China is only 68%. I think that for the time being, the capacity in China is going to keep at this level for a while.
Also it depends on the progress of the factory construction plans in India because of the COVID-19. There was some delay in our India factory development. Generally speaking, we believe that this capacity rate in China is going to keep that level for some time.
Is there any difference in terms of the spec for 5G base station, in terms of the telecom power, and for 4G?
I think that in terms of the architecture of 5G is actually quite different From 4G. It is 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. It is really hard to say that whether it is going to be 30%-50% increase.
It is not a final number or confirm number for that. You may hear about a term like serverless data center. I don't want you to misunderstand this concept. Actually, they are not saying that you don't need any servers in the future anymore, but they are just applying this virtualization for the servers. Each server then has to carry more data, so it doesn't mean that you are using less and less servers. I think it is less likely that you will see lower demand for server powers, at least in the near term.
I hope that we have answered all the questions. If you don't have any other questions, thank you for attending this online meeting. Hope everyone can stay healthy and stay safe. Thank you.