Vtech Holdings Limited (303) Earnings Call Transcript & Summary

Announcing its results for the 6 months ended 30th of September 2020. Since COVID-19 makes attendance in person more difficult than usual, this presentation is being accompanied by a live webcast. Let me introduce the management team. From my left, Mr. King Pang, Executive Director and Group President; Mr. Allan Wong, Chairman and Group CEO of VTech Holdings; Mr. Andy Leung, Executive Director and CEO of Contract Manufacturing Services; and Ms. Shereen Tong, Group Chief Financial Officer. First of all, Ms. Tong will present the group financial performance. Next, Mr. Leung will review the group's operations. Then Mr. Pang will give the management outlook for the rest of the financial year. We will finish our presentation with a Q&A session. [Operator Instructions] Now may I invite Ms. Tong to open today's presentation? Ms. Tong, please.

Thank you, Grace. Good afternoon, ladies and gentlemen, and all viewers online. First of all, I'd like to share with you the financial highlights of the group for the 6 months ended 30th of September 2020 compared with the same period of the last year. As you see on the slide, the revenue of the group was flat at USD 1,123.6 million. It was mainly due to the decrease in revenue in North America, Asia Pacific and other regions, which offset the higher sales in Europe. The gross profit of the growth rose by 3.5% to USD 357 million, and our gross profit margin also improved from 30.7% to 31.8%. The increase in gross profit and gross profit margin was mainly due to the lower material prices, while the direct labor costs and manufacturing overheads benefit from a weaker renminbi. Further productivity gains and a more favorable product mix also contribute to the improvement in gross profit and gross profit margin. Our operating profit rose by 5.7% to USD 142.6 million, and our operating profit margin also increased from 12% to 12.7%. The increase in operating profit and operating profit margin was mainly due to the improvement in gross profit and gross profit margin as well as the decrease in total operating expenses. Our operating profit also includes a fair value loss of USD 1.1 million on an investment in a company that designs and distribute integrated circuit products as compared with a fair value gain of USD 8.5 million in the same period of the last year. Government subsidies of USD 4 million received from various countries in response to COVID-19 were also record in the first half the current financial year. Our profit attributable to shareholders rose by 4.7% to USD 123.6 million, and our net profit margin also improved from 10.5% to 11%. As a result, our basic earnings per share rose by 4.5% to USD 0.49, and our Board of Directors has declared an interim dividends USD 0.17, same as the last financial year. Turning to the revenue by region. North America remains the largest market of the group, accounting for 43.9% of the group's revenue. Our sales in North America reduced by 5.6% to USD 492.9 million. The decrease in revenue was mainly due to the lower sales of our contract manufacturing services, which offset the higher sales of our electronic learning products and telecom products. Our sales to European market rose by 10.6% to USD 487.5 million. It was mainly due to the higher sales of our electronic learning products and contract manufacturing services, which offset the lower sales of our telecom products. In Asia Pacific region, the revenue of the growth reduced by 8.2% to USD 130.2 million. The decrease in revenue was mainly due to the lower sales of our electronic learning products and contract manufacturing services, which offset the higher sales of our telecom products. Other regions include Latin America, Middle East and Africa. The gross revenue in other regions reduced by 44% to USD 13 million. The decrease in sales in other regions was mainly due to the lower sales of all our 3 product lines. Our stock balance as of 30th September 2020 reduced from USD 457.3 to USD 436.1 million compared with the same period of the last year. Our stock turnover days also we used from 141 days to 120 days. The lower stock level compared with the same period of the last year was mainly due to the group's tightened inventory management in response to the impact of the COVID-19. Our trade debtors balance as at 30th of September 2020 increased from USD 489.9 to USD 521.7 compared with the same period of the last year. Our trade debtors turnover days, however, improved from 62 days to 60 days. The increase in trade debtors balance was mainly due to the increase in sales in the second quarter of the financial year compared with the same period of the last year. Our financial position remains very strong. [ We were debt-free. ] And our net cash balance as of 30th September 2020 increased from USD 102.5 million to USD 137.1 million compared with the same period of the last year. That's all of my presentation. I would now invite Mr. Andy Leung to share with you our operations review. Mr. Leung, please.

Thank you, Shereen. Good afternoon. I will now review our operation for the period. The COVID-19 pandemic have brought unprecedented challenges to most of the world business. When we announced our annual results for the fiscal year 2020 in May this year, key markets of the group were experiencing different level of lockdown, such as extensive closure of retail outlet, weak consumer sentiment and a severe slowdown in business activities. This result in a very low order visibility and consequence, with a pessimistic outlook for the fiscal year 2021. Despite many uncertainty, however, sales for the first 6 months turned out to be better than expected. The group have reported stable revenue and improved the gross profit margin and higher profit. Looking first at the cost picture. The group profit margin in the first 6 months of the fiscal year 2021 was 31.8% as compared with 30.7% in the same period last year. The improvement was due to a number of factors. Material prices were lower. Direct labor costs and manufacturing overhead benefited from a weaker renminbi. Further productivity gains and a more favorable product mix also improved the group gross profit margin. Regarding the trade tensions between China and the U.S.. On January 15, 2020, a Phase 1 trade deal was signed between Mainland China and the U.S., a 15% tariff that was imposed on n VTech residential cordless phones was to 7.5% effective from February 14, 2020. To mitigate the impact, the group has started the production of residential phones at our new facility in Penang, Malaysia. Some of our CMS customers have also been affected by the tariffs in the range of 7.5% to 25%. Those who wanted to relocate their production outside Mainland China have already moved to our facility in Muar, in Malaysia. The group ELP largely unaffected by the U.S. tariffs. Of course, the pandemic have brought unprecedented challenges to group operations. Early in 2020, with many countries in different level of lockdown, global supply chains were severely disrupted, and consumer demand weakened dramatically. In recent months, however, business operation had gradually returned to normal. Production capacity utilization at our facility are now at pre COVID-19 levels. Supply chains is operating as normal. Consumer demand have also recovered strongly in some markets. It has been especially robust for product relating to working and staying at home, which had benefited some of our product. Globally, e-commerce has grown rapidly as consumer has shift more to online purchase. During the first 6 months of the fiscal year 2021, sales to e-tailer and other online channel expanded to 16.2% of the total group revenue. Restrictions on travel and meetings nonetheless means new pattern of working, with much greater reliance on carrying out tasks and managing business remotely. VTech have been coping well with those challenges. Our global operation continues to run smoothly. As for liquidity, VTech is in a strong financial position, and we ended the half year with increased net cash and lower inventory. While managing the effect of pandemic, our priority had been protect the health and safety of our employees and customers. We continue to ensure a safe working environment at all our locations worldwide according to the recommendation from the government and WHO. VTech and our employee has also been giving much needed support to the local communities, including financial donation and supporting children in need with educational toys. I will now look at our operation in details, beginning with North America. Group revenue in North America decreased by 5.6% to USD 492.9 million in the first 6 months of the fiscal year 2021 as higher sales of ELP and telecommunication product were offset by lower CMS sales. North America remained our largest market, accounting for 43.9% of the group revenue. ELP revenue in North America rose by 9.8% to USD 278.1 million, driven by higher sales of stand-alone products. The increase reflects the group's strong position in electronic learning toys, a segment that have benefited from the pandemic as parent and children spend more time at home. During the first 9 months of the calendar year 2020, we strengthened our leadership as the #1 manufacturer of electronic learning toys from infancy through toddler and preschool in the U.S. In Canada, we also maintained our position as the #1 manufacturer in the infants, toddler and preschool toys category. Growth in stand-alone products came from higher sales of both LeapFrog and VTech brands. LeapFrog sales were especially robust. Preschool item offering overt educational value, including Learning Friends 100 Words Book and 100 Animal Books achieved strong sell-through. The Blue's Clues & You! series licensed product performed strongly. However, sales of LeapBuilders declined. VTech standalone product benefited from rising sales of infant and toddler products, KidiZoom camera, other Kidi line products and Go! Go! Smart family of products. These increases offset the decline in preschool products. There were innovative addition to the product lineup during the period. Go! Go! Smart Wheels saw the addition of Ultimate Corkscrew Tower. Building on the success of popular robotic toys, Myla the Magical Unicorn, we launched Myla's Sparkling Friends, a line of toys that bring color play to life using fantastical characters. The new Go! Go! Cory Carson vehicle and playset hit the shelf during the period. The 2 seasons of the associated animation, along with a special edition entitled, Go! Go! Cory Carson Summer Camp, are now streaming on Netflix. Sales of platform products in North America declined slightly. At LeapFrog, the platform product business post overall growth. The grow in children educational tablets and interactive reading system offset the decline in RockIt Twist. The growth was amended by the introduction of Magic Adventures Globe. Subscription to the LeapFrog Academy continues to grow steady. At VTech, sales of platform products saw a decline, as higher sales of Touch & Learn Activity Desk were insufficient to compensate for lower sales of KidiZoom Smartwatches and KidiBuzz. Telecommunication product revenue in North America saw a 3.7% increase to USD 130.2 million, mainly driven by higher sales of residential phones. Sales of commercial phone and other telecommunication product held steady. During the period, sales of residential phone in North America rose as the trend of work from home led consumer replace and upgrade their fixed line telephones. The VTech branded super-long-range cordless telephone performed especially well. In the first half of the fiscal year 2021, we remain the exclusive supplier to a key retailer in the U.S. and strengthened our leadership poses in the U.S. residential phone market. The commercial phones and other telecommunication products business in North America was stable. SMB phone, hotel phones, VoIP phones and conference phones post sales decreases, as they were hit by slump in business-related activity and in travel. However, headsets achieved higher sales, boosted by the trend of work from home. Baby monitors. The CareLine range and IAD benefited from the stay at home advice as well. The VTech 1080p 7 inches Smart Wi-Fi baby monitor selling particularly well. As a result, VTech baby monitor strengthened their position as the number 1 brand in the U.S. and Canada. CMS revenue in North America fell by 40.9% to USD 84.6 million with declines in all product category. The reduction in revenue was primarily due to the negative impact of the pandemic. The professional audio industries was significantly impact by the restriction on public gatherings, a major customer experiencing excess inventory as a result. A drop in replacement demand for coin and note recognition machine and over inventory at an industrial printer customer contributed to the sales decline in industrial products. Medical and health products saw lower order of hearing aids as sale activity were significantly affected by the pandemic. Sales of solid-state lighting fell as contract could not be concluded and project-based bidding ceased. Communication products recorded a sale decline as customers phased out their product range. The group nonetheless managed to add new customers in the field of professional audio equipment and industrial products during the period. Turning now to Europe. Group revenue in Europe increased by 10.6% to USD 487.5 million in the first 6 months of the fiscal year 2021 as higher sales of ELP and CMS offset lower revenue from telecommunication products. Europe remained VTech's second largest market, accounting for 43.4% of the group revenue. ELP revenue in Europe rose by 8.2% to USD 157.6 million, with higher sales of both stand-alone and platform products. Geographically, sale increased in France, the U.K., Germany, the Netherlands, while declining in Spain. In the first 6, 9 months of the calendar year 2020, VTech was the #1 infant and toddler manufacturer in France, the U.K., Germany and the Benelux country. In stand-alone products, both the VTech and LeapFrog brands achieved higher sales. For the VTech brand, growth was led by preschool product, KidiZoom camera, other Kidi line products and Switch & Go Dinos. This offset decline in infants product and the Toot-Toot family of products. The new Go! Go! Cory Carson vehicle and playset were rolled out to the major European market in September 2020 under the name of Toot-Toot Cory Carson. LeapFrog saw rising sales of infants, toddler and preschool product in the first half of the fiscal year, with strong sales of Learning Friends 100 Words Book and 100 Animal Books (sic) [ 100 Animals Book ]. This offset a decline for Bla Bla Blocks, which is the name in Europe for LeapBuilders. Platform Products saw growth in the sales of both VTech and LeapFrog branded products. For VTech, the main drivers were KidiZoom Smartwatches, Touch & Learn Activity Desk and children educational tablets. Growth in this product offset a decline in KidiCom Max. At LeapFrog, the revenue increase was driven by higher sales of Magic Adventures Globe and interactive reading system, which offset decline in RockIt Twist and children educational tablet. During the period, Speak & Learn Puppy and KidiZoom Video Studio HD were named Best Infant Toys and Best High-Tech Toy in France. Revenue from telecommunication product in Europe decreased by 8.4% to USD 52.5 million in the first 6 months of the financial year 2021 and sales of residential phone, commercial phone and other telecommunication product declined. In Europe, the group sell residential phone to major telephone company in the region on an ODM basis. The pandemic resulted in reduction of order from this customer as their business activities slow down. For commercial phones and other telecommunication products, higher sales of CAT-iq handset, the CareLine IAD and headsets were insufficient to offset decline in baby monitor, VoIP phones and conference phones. Stay at home advice across Europe benefited sales of CAT-iq handsets, CareLine products, IAD and headset as people are upgrading their communication devices. Baby monitors saw sales decrease as a major customer reduced orders. Lockdowns and travel restriction led to the cancellation of trade show and slowdown in business activities, resulting in a lower order for real IP phones and conference phones. Sales of the group hotel phone in Europe held steady. CMS revenue in Europe rose by 16.8% to USD 277.4 million. Hearable, medical and health products, home appliance and communication products saw higher sales. This offset declines in professional audio equipment, IoT products and switching mode power supplies. Hearable recorded significant growth as demand for headset was boosted by the need to work from home. A customer moving production of its new version of a true wireless headset to VTech also contributed to the sales increase. Medical and health product added a new customer during the period and saw sales of hair removal product rise, offsetting a decline in order for hearing aid. Business from home appliance was stable, while communication product benefited from increasing order Wi-Fi routers. In contrast to these increases, professional audio equipment posted lower sales as higher demand for audio interface equipment failed to offset lower orders for audio mixers and amplifiers. IoT products also saw sales decrease as the pandemic significantly slowed down the installation of smart meter the U.K. Sales of Internet-connected thermostat and air conditioning control remained stable. Sales of switching mode power supply were lower as the customer continues to transfer production back in-house following a change in ownership. Group revenue in Asia Pacific decreased by 8.2% to USD 130.2 million in the first 6 months of the fiscal year 2021 as lower sales of ELP and CMS offset higher sales of telecommunication products. The Asia Pacific region represented 11.6% of the group revenue. Revenue from ELP in the Asia Pacific fell by 9.4% to USD 40.4 million as growth in Australia were offset by lower sales in Mainland China. Australia saw a robust sales increase on strong sell-through of both VTech and LeapFrog brand products. In the first 9 months of the calendar year 2020, VTech gained market share and have become the #1 manufacturer in infants, toddler, toys category in Australia. In Mainland China, growth in online sales was insufficient to compensate for the decline in off-line channel. Revenue of telecommunication product in Asia Pacific increased by 15.3% to USD 15.8 million due to higher sales in Australia, Japan and Hong Kong. In Australia, growth was mainly driven by baby monitors, while Japan saw increases order for residential phone from an existing customer. In Hong Kong, IAD were the key driver of higher sales. CMS revenue in Asia Pacific decreased by 11.5% to USD 74 million as lower sales of medical and health products and home appliance offset growth in professional audio equipment and communication products. The movement control order by the Malaysian government in mid-March also affected sales as this caused our CMS production facility there to shut down for several weeks. In medical and health products, sales of diagnostic ultrasound system were lower as hospitals relocated their budget to purchase COVID-19 related equipment. For home appliance, orders fell as product reached the end of life cycle, while order for other products slowed down as a result of the pandemic. Contrasting with those decreases, the growth in professional audio equipment was driven by a rise in revenue from a new customer supplying USB streaming microphone for online KOLs. Sales of communication products were also higher, with order from marine radio increasing as a second-generation of product was launched during the period. Finally, group revenue in Other Regions, comprising Latin America, the Middle East and Africa, fell by 34% to USD 13 million in the first 6 months of the fiscal year 2021. The decrease was attributable to lower sales of all 3 product lines. Other Regions account for 1.1% of the group revenue. ELP revenue in Other Regions declined by 35.2% to USD 5.9 million for the period as higher sales in Africa were offset by lower sales in Middle East and Latin America. Telecommunication product revenue in Other Regions decreased by 27.4% to USD 6.9 million. The decline was attributable to sales decrease in Latin America and Africa, which offset an increase in Middle East. CMS revenue in Other Regions was USD 0.2 million in the first 6 months of the fiscal year 2021 as compared to USD 1.1 million in the corresponding period of the prior fiscal year. That concludes our review operation. I will now hand over to King for the outlook.

Thank you, Andy. Good afternoon, ladies and gentlemen. The ongoing impact of the COVID-19 pandemic brings a high degree of uncertainty to assessing the outlook for the remainder of the financial year. The recent surge in infection rates in the U.S. and Europe, together with sustained high levels of unemployment, could weaken consumer sentiment in our key markets. Consequently, group revenue for the full year is not expected to grow. Gross margin, nevertheless, is forecast to improve year-on-year. Meanwhile, we are adapting our businesses to consumer shift towards online purchases. To capitalize on this trend, we're increasing our investments on online channels. Looking at all the individual businesses. ELP's revenue is focused to remain broadly stable for the full financial year. In North America, the positive momentum for both VTech and LeapFrog brands is forecast to continue, with the sales outlook for LeapFrog preschool toys especially promising. In Europe, however, the nationwide lockdowns recently mandated, especially in France, Germany and the U.K., may negatively impact holiday sales. In Asia Pacific, the trend in Australia is expected to remain robust. For Mainland China, sales are expected to pick up in the second half as shipment to our maternity-infant-child specialty channel and other brick-and-mortar channels are showing continuous improvement. For telecommunication products, revenue for the full year may decline slightly. Sales of residential phones are expected to hold steady. While the recovery in commercial phones is likely to remain slow. Paving our way for future growth, a new line of Voice over IP phones under the Snom brand will be rolled out in early 2021. For hotel phones, responses to our latest range based on SIP and PSTN technologies has been good. This sets up VTech to benefit from the market consolidation, that is underway even though the challenges currently faced by the hospitality industry will dampen demand in the short term. The momentum in CAT-iq handsets, the CareLine range and integrated access devices remain positive, while sales of baby monitors are expected to be stable. CMS revenue is expected to increase for the full financial year, led by strong orders for handsets -- of our headsets and supported by recovery in other product categories. Our new NPI center in Shenzhen will open up additional business streams. It aims to capture businesses from start-up worldwide, especially those in Mainland China's Greater Bay Area. State of the art equipment is currently being installed. The center should be fully operational by the end of 2020. In Malaysia, with the Phase 1 expansion of our CMS facility in Muar now complete, work is moving ahead on Phase 2. When it's completed, it will add -- it will increase capacity by 50%. Thank you. This concludes our presentations. We now look forward to answering your questions.

Thank you, King. We will now begin the Q&A session. [Operator Instructions]

It's [ Leon ], [ ROC Investments ]. Just maybe you can give us a little color on the cost trends in the second half of your fiscal year, key areas like wages, ICs and other raw materials?

Let me give you my outlook for the material costs. Material costs should still be trending down. As the cost of oil came down, we expect plastic prices should come down also, IC prices. After the first half, which we saw a somewhat reduction in the cost, we will see the second half will remain at a low level. We do expect IC prices to increase, except for a few items, which is affected by the Sino-U.S. sanctions. Other material prices we expect to be very stable. So overall, I expect the material cost trend to be low to stable in the next -- in the coming half year. Thank you.

Did those Sino-U.S. sanctions cause any disruptions?

Yes. As -- yes. Allan. As we have said in our Chairman statements, there's no new development on the trade sanctions, I think the -- is basically what we have seen when we announced the results for the last fiscal year. So it's basically the same, so with no additional tariffs being imposed. By and large, we are not affected, except one or two items in the telephone and one item in the ELP area. So other than that, we are largely affected.

Congratulations with first half results. I find them very strong. Where I'm surprised when you said you benefit in certain areas due to people staying at home. What surprised me is that the LeapFrog Academy has had steady growth. So there was no acceleration of sales. Could you please comment on this? The second is the increase of sales in Europe. How much is due to currencies? Or what would be the sales increase in local currency terms? And one more question regarding our second half. How about sell-in to retailers in Europe now and in the U.S.? To the cash position, I think increase is also due to the cut and final dividend. What can we expect? Will you make good on the cut, the last final dividend, the coming one?

Yes. Okay. I will probably ask King to answer the first -- your first 3 questions. I will do your last question.

I will answer your first and third question, and then I will answer qualitatively your second question. And I may have to pass it to Shereen to answer part of the second question about exactly quantitatively, what is the increase in constant currency. Okay LFA, we did see an acceleration in sign-up rate as well as in being able to retain our users, okay? So when we say steady, it really reflects the fact that LFA at this point still represent a reasonably small part of our overall toys business. So that's how we word it. Second half sell-in. We still have -- right now, we are in the second week of November. We still have between 4 to 5 weeks of local shipment. And historically, this is the biggest 5 weeks for our entire year. We are still seeing pretty decent order book. As of last week, unless Shereen hasn't told me, we haven't heard really big cancellations in order. So we're keeping our fingers crossed. European sales, the currency, mainly euros and sterling appreciation, especially for euros, the appreciation during the period really hasn't benefited us very much because of our currency hedging action that we took earlier in the year. Shereen, do you have anything to add?

Yes. That means in local currency, we also increased the revenue expected for our electronic learning product business. As for telecom, in Europe, most of the sales on the ODM, and we also receive U.S. dollar. And part of it is we received euro. And then for CMS, actually, the increase in revenue is mainly due to the local currency increase. And the local currency meaning U.S. dollar because for CMS, all our customer, we receive U.S. dollar, no matter we sell in Europe or in Asia Pacific. So for ELP in Europe, in local currency, we also saw an increase in the first half. Even though we have had most of the currency in the first half of the financial year, we can't enjoy all the benefits regarding the recent appreciation of the euro and pounds, but we still get some benefit. But it's not as significant as what the market and trend.