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Hollysys Automation Technologies Ltd
NASDAQ:HOLI

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Hollysys Automation Technologies Ltd Logo
Hollysys Automation Technologies Ltd
NASDAQ:HOLI
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Price: 22.74 USD -2.28% Market Closed
Updated: May 20, 2024

Earnings Call Transcript

Earnings Call Transcript
2019-Q2

from 0
Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Hollysys Automation Technologies' Earnings Conference Call for Fiscal Year 2019, the Second Quarter and the First Half Year ended December 31, 2018. [Operator Instructions] Please be advised that this conference is being recorded today, February 18, 2019, Beijing Time.

I would now hand the conference over to Mr. Arden Xia, the Investor Relations Director of Hollysys Automation Technologies. Thank you. Please go ahead, Mr. Xia.

A
Arden Xia
executive

Hello, everyone, and thank you for joining us. Today, our speakers will be Mr. Baiqing Shao, CEO of Hollysys Automation Technologies; Mr. Steven Wang, CFO of Hollysys; and myself, the IR Director of Hollysys. On today's call, Mr. Shao will provide a general overview of our business, including some highlights for the quarter. Mr. Steven Wang will discuss our performance from financial perspective, and we will answer questions afterwards.

Before getting started, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts, including statements relating to the expected growth of Hollysys' future product introductions and the mix of products in future periods and future operating results. Such forward-looking statements based upon the current beliefs and expectations of Hollysys' management are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements. The following factors, among others, could cause actual results to differ from the statements: business conditions in China and in Southeast Asia; continued compliance with government regulations; legislation or regulatory environments; requirements or changes adversely affecting the businesses in which Hollysys is engaged; cessation or changes in government incentive programs; potential trade barriers affecting international expansion; fluctuations in customer demand; management of rapid growth and transitions to new markets; intensity of competition from or introduction of new and superior products by other providers of automation and control system technology; timing, approval and the market acceptance of new product introductions; general economic conditions, geopolitical events and regulatory changes; as well as other relevant risks detailed in the Hollysys' filings with Securities and Exchange Commission. The information set forth herein should be read in light of such risks. Hollysys does not assume any obligation to update the information discussed in this conference call or in its filings. Please note that all amounts noted in this conference call will be in U.S. dollars, unless otherwise noted. And now I would like to turn the call to Mr. Baiqing Shao. Please go ahead, Mr. Shao.

B
Baiqing Shao
executive

Thank you, Arden, and greeting to everyone. I would like to discuss some key events during this quarter. Revenue and new contract for our IA business for the quarter stayed at $49.5 million and $43.9 million, representing a 14.2% and 4.1% year-to-year decrease respectively. From a half year perspective, revenue and contract present a 6.9% year-to-year decrease and 4.5% year-to-year increase respectively. Despite macroeconomic headwind, management believe that our IA business remains on a healthy path and several highlights are worth mentioning. We kept our leadership in power and devoted adequate resource in chemical and petrochemical for expansion while maintaining our involvement in various other industries. In power, despite a slowdown in coal fire construction, steady performance in thermal power and new energy as well as after-sale services have been stabilizing factors for our power business that should not be ignored. We kept addressing our valuable customers based on response to various services demands. The communication with our customers have been fruitful and constructive, evidenced by the steady after-sale growth. Beyond that, we are also actively building our matrix of intelligent solutions that help bring our customers to the next era of manufacturing. Our efforts are well-rewarded as our value-added solution on equipment management, control optimization, and information security, et cetera were accepted by more customers. Furthermore, we are proud to announce our first intelligent plant solution in the power industry with Liaoning Diaobingshan Power Company. With full-scale data integration as the key, the solution will help realize greater visibility on equipment consumption, greater operational flexibility in power unit and will ultimately improve the efficiency and management. With this milestone, we will continue to leverage the know-how we have accumulated and join hands with more customers from various industries to reshape their way of manufacturing. Quarterly revenue and new contract for our railway business were $63.5 million and $173.1 million, representing an 8.7% year-to-year decrease and 20.4% year-to-year increase respectively. From half -- the half year perspective, revenue and new contract recorded an 8.7% and 61.8% year-to-year increase respectively. In high-speed rail we signed 98 sets of C3 ATP from quarter, along with the numerous advanced and heavy maintenance contracts. We also signed a track circuit contract for the regular speed freight railway from Jingbian to Shenmu, Shaanxi Province, China. In subway business, milestone was achieved as we provided our first SCADA + Integrated Cloud Platform solution to Hohhot subway line 1 and line 2 as well as Shenzhen Subway Line 6. We see this as an effective addition to our subway business as we keep executing the steady expansion strategy. For high-speed rail business, calendar 2018 (sic) [ 2019 ] is expected to be a busy year as 13th Five-Year Plan period is entering its final 2 years. Going forward into the future and given a visible long-term railway construction plan, we will continue to adhere to the diversity strategy for stable and healthy growth to improve our local service network for more value-added and differentiated services and we keep leveraging our strong R&D capacity for the preparation of next generation railway technology. In overseas business, M&E recorded a quarterly revenue and new contract of $36.5 million and $36.5 million, representing a 20.8% and 20.1% year-to-year increase respectively. From a half year perspective, revenue and new contract recorded a 26.6% and 23.3% year-to-year increase respectively. Measures taken to improve the operation have brought constant benefit to the M&E business, while geopolitical issues in Middle East and as well as macro economy in Southeast Asia remained to be watched. In our IA overseas business, we continued to work with major domestic SOEs on EPC projects while at the same time contributed adequate effort to expand our partnership. We took one step further in the localization of our business as the construction of our India assembly and testing plant was completed. With this we have set a foothold for improved response time to our overseas customers. Going forward, we expect increasing level of coordination to be built between our overseas and domestic business. With that, I'd like to turn the call over to Steven Wang who will read the financial result analysis.

S
Steven Wang
executive

Thank you, Mr. Shao. I would like to share some highlights for the second quarter and first half year ended December 31, 2018. Comparing to the second quarter of the prior fiscal year, the total revenues for the 3 months ended December 31, 2018, decreased from $157.4 million to $149.5 million, representing a decrease of 5%. Integrated contract revenue decreased by 13.2% to $116.7 million. Product sales revenue decreased by 39.1% to $5.9 million and service revenue increased by 102.5% to $26.9 million. Company's total revenues can be presented in segments as follows. For the 3 months ended December 31, 2018, industrial automation revenue, $49.5 million; rail transportation automation revenue, $63.5 million; mechanical and electrical solution revenue; $36.5 million. Total revenue from the second quarter; $149.5 million. For the 6 months ended December 31, 2018 industrial automation revenue, $107.2 million; rail transportation automation revenue, $113.9; mechanical and electrical solution revenue, $67.1 million; total revenues for the first half of the fiscal; $288.2 million. Overall non-GAAP gross margin was 38.2% for the 3 months ended December 31, 2018, as compared to 39.4% for the same period of prior year. The non-GAAP gross margin for integrated contract, product sales and services were 30.8%, 72% and 62.9% for the 3 months ended December 31, 2018, as compared to 34.5%, 67.4% and 68.6% for the same period of the prior year respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margins. Selling expenses were $7.9 million for second quarter, an increase of $0.2 million or 1.6% compared to $7.7 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 5.3% and 4.9% for the 3 months ended December 31, 2018 and 2017 respectively. G&A expenses excluding noncash share-based compensation expenses were $11.6 million for the quarter ended December 31, 2018, a decrease of $0.6 million or 4.5% compared to $12.2 million for the same quarter of the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.8% and 7.7% for the quarters ended December 31, 2018, and 2017, respectively. R&D expenses were $10.4 million for the second quarter, representing a decrease of $0.2 million or 1.7% compared to $10.6 million for the same quarter of the prior year. Presented as the percent of total revenues, R&D expenses were 7% and 6.7% for the quarter ended December 31, 2018 and 2017 respectively. VAT refunds and government subsidies were $14.8 million for the second quarter as compared to $9.4 million for the same period in the prior year, representing a $5.4 million or 57.1% increase, which was primarily due to the increase of VAT refunds. The income tax expenses and effective tax rate were $6.3 million and 12.5% for the second quarter as compared to $9.3 million and 20.4% for the comparable prior year period. The effective tax rate fluctuation was mainly due to the different pretax income mix with different tax rates as Company's subsidiaries are subject to different tax rates in various jurisdictions. The non-GAAP net income attributable to Hollysys was $44.3 million or $0.73 per diluted share for the 3 months ended December 31, 2018. This represents a 22.2% increase over the $36.3 million or $0.60 per diluted share for the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $44.1 million or $0.72 per diluted share, representing an increase of 21.8% over the $36.2 million or $0.60 per diluted share, reported in the comparable year prior year period. Contracts and backlog highlights. Hollysys achieved $253.5 million of new contracts for the second quarter of fiscal year 2019. The backlog as of December 31, 2018, was $590.1 million. The detailed breakdown of new contracts and backlog by segments is as follows. New contracts achieved for the 3 months ended December 31, 2018, industrial automation, $43.9 million; rail transportation automation, $173.1 million; mechanical and electrical solutions, $36.5 million. Backlog as December 31, 2018, industrial automation, $165.3 million; rail transportation, $329.7 million; mechanical electrical solutions, $95 million. Cash flow highlights. For the 3 months ended December 31, 2018, the total net cash flow -- cash outflow was $2.2 million. The operating cash flow was $28.5 million. The investing cash flow was $20.4 million, mainly consisted of $108.5 million term deposit which was partially offset by $88.6 million maturity of time deposits. The net cash in use in financing activities was $11.1 million, mainly consisted of $10.9 million payments of dividends and $3.2 million repayments of short-term bank loans which were partially offset by $2.9 million proceeds from short-term bank loans. Balance sheet highlights. The total amount of cash and cash equivalents were $290.8 million (sic) [ $270.8 million ], $276.9 million and $231.1 million as of December 31, 2018, September 30, 2018 and December, 2017 respectively. For the second quarter DSO was 157 days as compared to 147 days for the comparable prior year period and 170 days for the last quarter. The inventory turnover was 39 days as compared to 48 days of comparable prior year period, 51 days for the last quarter.

A
Arden Xia
executive

At this time, we like to open up for QA session. Please note that Chinese-speaking participants we can also do the Q&A in Mandarin and we'll provide translation. [Foreign Language] Operator, please.

Operator

[Operator Instructions] The first question is from the line of Thomas Zhang from Morgan Stanley.

X
Xiaoshi Zhang
analyst

[Foreign Language]

A
Arden Xia
executive

Okay. Let me translate the questions. The first question is about, for the second quarter the industrial automation new order and the revenue compared decreased. And also the backlog compared to the history also at a low rate. What about the expectation in future about the IA revenue and the new order and also backlog? The second question about the VAT refund, why this quarter is compared so high than the prior fiscal year? The third question is about the railway transportation new order. This quarter we could see compared an increase about $117 million, so can you give me a breakdown number about what's inside? We know about the -- from the announcement before the TCC plus ATP contract announcement around $15 million. So what about the others including within the $117 million? And also we know about ATP, you were about 98 sets of the contract at the first half fiscal year 2019 year, but what else? So give me more detail about the contract, the break down number.

B
Baiqing Shao
executive

[Foreign Language]

A
Arden Xia
executive

About the industrial automation compared decreased beyond the macroeconomic slowing down. Internally from our company side there are several reasons. One element is about the consolidated financials. Compared last quarter, the prior year, we have our intelligence company and I mean spin off compared this quarter. So this is by influence. And secondly about the nuclear business and also last fiscal year the same quarter, revenue and the contract are both higher than this quarter of fiscal year 2019. And also the exchange rates have some influence. So these aspects account for the decrease about the IA. Actually if eliminated these factors, the IA for the quarter, the new order should compare increase and also but the revenue compared decrease it just made from those reasons. But in future I mean the whole fiscal year to see we still have confidence to achieve compared positive growth for the IA.

B
Baiqing Shao
executive

[Foreign Language] About the major factor, actually [indiscernible] have the fluctuation, but over the year later it should be steady compared to prior year. So it really depends on when we get the money from the bureau, tax bureau. And another one I want to add a supplement is about the backlog for the whole company. Actually still have actual change about -- according to ASC 606 we adopt from July 1, 2018. So that also influenced the backlog around CNY 240 million. So that's also another reason for the backlog compared low base in the history.

X
Xiaoshi Zhang
analyst

[Foreign Language]

A
Arden Xia
executive

About the railway transportation new order beyond the TCC, ATP you said about the $10 million, what else? The others will not give the specific number but this is also including the subway contract and also including like the service contract within the high-speed rail. And -- but generally speaking for the whole railway transportation, we -- in our -- shorter term the national railway investment in 2019 is expected to be level with that of the year 2018. Well, stronger than the year before. A longer term national railway network planning indicates a vision for a high-speed rail that covers around [ 4 to 5,000 ] kilometers. As of now, less 65% has been achieved. So more construction is expected in the long term.

X
Xiaoshi Zhang
analyst

[Foreign Language]

A
Arden Xia
executive

I have the supplement question about the track surveyed, what about the current execution condition including the contract size and also the revenue recognition? Second question about industrial automation. You said several factors that account for the decline. One is the exchange rate and also how the intelligence company spin off and also how the nuclear. So I want to confirm, it's excluding these factors, actually the second quarter new contract should compared increase, is that right? And the first question is about the intelligence company spin off, how much about those contract influence? [Foreign Language] The first question, actually the track surveyed we not disclose that number exactly. But I call tell you about the current execution contract including 2 products. One is regular speed track circuit. This is not a too large contract, it just like tens of million china yuan level. But the high-speed rail -- another product is high-speed rail, but it's [indiscernible] also not a very large contract site. The purpose is to -- when we are finished for this kind of year we can apply for the license to participate at the high-speed rail track circuit...

B
Baiqing Shao
executive

[Foreign Language]

A
Arden Xia
executive

The second question about the intelligence company spin off, actually we already disclosed in July, I mean last calendar year 2018. So that part we invest into the [ Ningua ] company. And this part right now performance, I mean the Ningua company performance steady and is excluding this element influence, actually yes in this automation no matter quarterly or half year result, new contract should compare increase. Operator, next one please.

Operator

The next question is from the line of Jacqueline Du from Goldman Sachs.

J
Jacqueline Du
analyst

[Foreign Language]

A
Arden Xia
executive

I have 2 question. One is for the fiscal year 2019 I cannot see any guidance. So the half year already passed, so could you give us guidance for the whole fiscal year? The second question is about the -- in the P&L, the other income have $5.9 million. This is compared increased a lot. So can you explain what is inside about this item?

B
Baiqing Shao
executive

[Foreign Language]

A
Arden Xia
executive

Actually at the beginning of this fiscal year we not give the guidance. So during the time we explained to the shareholder and the institution investors we actually -- we focus about the -- we are considering to use more faith to support a business development. And also the strategic thinking about through cooperation or investment, a lot of the other activity to support a business from the number to say we have confidence that we bring our performance number. Actually the whole fiscal year we still have confidence to achieve compared increase.

S
Steven Wang
executive

[Foreign Language]

B
Baiqing Shao
executive

But the operating income, the main reason high compared to the other in history, the main reason is attribute our investment income. When performing asset assessment for a new -- that is published Ningua company we recognize additional value. So that also like what I mentioned the [indiscernible] company when we spin off and we invest into the Ningua company and right now this part is a gain for the P&L. And right now everything goes [indiscernible] performance also good. And also this is the main reason, I mean. Also you know other income including the other more elements like they act as [indiscernible] off and also the government related some activities, but the main reason is what I said.

J
Jacqueline Du
analyst

[Foreign Language]

A
Arden Xia
executive

Can you explain? I want to ask Mr. Shao. Can you explain about what your strategic thinking right now? You said not in the guidance so can you talk more -- give us more color about what you are doing about the direction for the business right now?

B
Baiqing Shao
executive

[Foreign Language]

A
Arden Xia
executive

The CapEx [indiscernible] 3 plus 1 plus N strategy. The 3 plus 1 refers to operating our 3 main business capability including industrial automation, railway transportation automation and pneumatical automation. By introducing intelligent manufacture technology that covers industrial internet, industrial big data and artificial intelligence, such operator will enable us to offer more comprehensive solutions and the better infusion and to boost the overall digitalization and the intelligence level of our business. The 1 plus N refers to developing an industrial internet platform that is open to enterprise client application developer, system integrator and platform operator. The platform will bring value to large, medium and small enterprise in their cause of digitization transformation to contribute to their core and formation of our sustainable industrial internet ecosystem and to realize greater manufacturing intelligence for the entire industry. To implement the strategy, we will improve the utilization of those internal and external resources. We have devoted the resources to the construction of our intelligent manufacturer innovation center and to -- to promote the upgrade and of our entire business was greater digitalization and [indiscernible]. We are building our comprehensive solution matrix that convers equipment [indiscernible] and production management system and industrial internet platform. We are also bolstering our capability in 2 cycles surveys, for intelligence manufacturing that covers planning, designing, infusion and operation with the industrial infrastructure at the intended business area. So generally speaking another example also we created and setup the [indiscernible] company. So this company also help Hollysys to develop some basic platform products, so [indiscernible] the whole Hollysys to develop our IA business. This is including the process [indiscernible]. And so internally we want to through those development to improve our capability of the company industrial automation control and also we want to provide more comprehensive solutions to the customer.

B
Baiqing Shao
executive

[Foreign Language]

A
Arden Xia
executive

Okay. And also we would raise the big industrial automation concept. This is just [indiscernible] whole capability into the industrial automation. So [indiscernible] Hangzhou company the current process, the mature process in the process control industry they already have strong track record and also have sales channels. So we want them to deliver to our customer the comprehensive solutions focused on the big industrial automation control [indiscernible]. And through -- those are the things that can improve our operating efficiency. So by the time constraint we now take one last question from the queue. Operator, please.

Operator

The next question comes from the line of Alex Chang from Citigroup.

A
Alex Chang
analyst

[Foreign Language]

A
Arden Xia
executive

I have a additional question, it's about -- it refers to Mr. Shao's side and IA like we have some new project for the intelligence plus and also in the railway transportation we have the SCADA and the integrated cloud platform solution to the subway. So can you introduce more about these 2 projects, what is the difference compared before project and what about the gross margin for these 2 projects.

B
Baiqing Shao
executive

[Foreign Language]

A
Arden Xia
executive

This question also can match what has added the strategy. And actually the IA, this product, intelligent [indiscernible] focused the coal-fired plant. And right now along for the upgrading by the customer we also provide the intelligent solutions. This is including the basic control system and also the intelligent management. The differences compared before, we added a lot of new functions and matched [indiscernible] like the prediction and also the maintenance. This is -- you don't have to shut down the whole factory and we can help you to predict the equipment status. And also about the data, before not used but right now we use the data for the analyzing to predict the working condition for the future, 10 or 20 minutes, for example. So this can improve the efficiency of the customer. And right now the project is a demonstration project. So the gross margin have no too much increasing. But in the future along when we setup at the track record we can show to the customer about the results to help them improve the efficiency so we'll [indiscernible] to value gross margin. And the subway, the project, the SCADA, actually the platform can integrate a lot of subsystems like alarm system, power system, but right now also the same issue. The data is not useful. So right now, we -- the platform can collect that data into the cloud and that they will use the cloud to do the analyzing. And this is a lot of new demand and also value adding services. This is also the demonstration project. So the gross margin just not added more, it just like before project. But as what I said, the impact is significant. In future along we provide more big solution, comprehensive solution to dealing with the demand of customer upgrading and they will see the value what do we provide. Thank you. Okay. Thank you, everyone. [Foreign Language]

A
Alex Chang
analyst

[Foreign Language]

B
Baiqing Shao
executive

[Foreign Language]

A
Arden Xia
executive

Okay.

B
Baiqing Shao
executive

[Foreign Language]

A
Arden Xia
executive

Okay. The question is about the -- you said you provide more value adding services, but what about the contract and revenue reflect, is it adding more, the question. The answer is, for industrial automation, yes, because based on before just the control system, we added the more intelligence services and also including the data, the other platform. So the contract size is larger than before and also the revenue larger than before. But the subway sector not like this. Subway sector, because this value adding services it just start so not add more value to the contract or the revenue. Thank you. Thank you everyone for joining us today. If you haven't got a chance to raise your question, we will be pleased do answer them through follow-up contacts. We're looking forward to speaking with you again in near future. Thank you.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.