Vtech Holdings Limited (303) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to all our viewers online. Today, VTech Holdings Limited is announcing its results for the year ended 31st of March 2024. Let me introduce our management. Mr. King Pang, Executive Director and Group President; Mr. Allan Wong, Chairman and Group CEO of Retail 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 in North America and Europe. Mr. Pang will then continue to share the rest of the segment results and talk briefly about the recent Gigaset acquisition before giving management outlook for the coming financial year. We will finish our presentation with a Q&A session. 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 would like to share with you the financial highlights of the group for the year ended 31st of March 2024 compared with the same period of the last year. As you see from the slide, the revenue of the growth reduced by 4.3% to USD 2,145.7 million. The decrease in revenue was mainly due to the decrease in revenue in North America, Europe and other regions, which offset the higher sales in Asia Pacific. The gross profit of the group increased by 0.2% to USD 634.9 million. Our gross profit margin also improved from 28.3% to 29.6%. The increase in gross profit and gross profit margin was mainly due to the decreases in flight charges and inventory provisions as well as the lower direct labor costs and manufacturing overheads arising from the depletion of the renminbi against the U.S. dollar and the reduction in number of workers compared with the last financial year. These offset the negative impacts of our higher cost of materials as a percentage of the group's revenue resulting from the change in product mix despite the decline in material prices. Our operating profit increased by 8.7% to USD 196.2 million, and our operating profit margin also improved from 8.1% to 9.1%. The improvement in operating profit and operating profit margin was mainly due to the increase in gross profit and gross profit margin as well as the reduction in total operating expenses. Our profit attributable to shareholders increased by 11.7% to USD 166.6 million, and our net profit margin also increased from 6.7% to 7.8%. As a result, our basic earnings per share increased by 11.5% to USD 0.66. And our Board of Directors has proposed a final dividend of USD 0.65 year -- or USD 0.48, bringing the total dividend per share for the year to USD 0.65. Turning to the revenue by region. North America remained the largest market of the group, accounting for 43% of the group's revenue. Our revenue in North America reduced by 6.3% to USD 922.6 million. The decline in revenue was mainly due to the lower sales of our electronic rental products and telecom products, which offset the higher sales of our contract manufacturing services. Our sales to European market reduced by 3.1% to USD 888.3 million. It was mainly due to the lower sales of our electronic learning products and telecom products, which offset the higher sales of our contract manufacturing services. In Asia Pacific region, the revenue of the group increased by 0.6% to USD 317.7 million. It was mainly due to the higher sales of our contract manufacturing services, which offset the lower sales of our electronic learning products and telecom products. Other regions include Latin America, Middle East and Africa. The gross revenue in Other region reduced by 29% to USD 17.1 million. The decrease in sales in other regions was mainly due to the lower sales of our electronic learning products and telecom products. Our stock balance as of 31st of March 2024, reduced USD 475.5 million to USD 348 billion compared with the same period of the last year. Our stock turnover days also shortened from 128 days to 101 days. The lower stock balance was mainly due to the decrease in raw materials and finished goods as the supply constraints have eased compared with the same period of the last year. Our trade [indiscernible] balance as of 31st of March 2024, reduced from USD 277.2 million to USD 224.6 million compared with the last financial year. Our trade [indiscernible] total per day, however, increased slightly from [indiscernible] days to 60 days. The lower trade at this balance was mainly due to the decrease in revenue in the fourth quarter of [indiscernible] year 2024 compared with the same period of the last year. Our financial positions remain very strong. We are debt [indiscernible]. Our net cash balance as of 31st of March 2024 increased from USD 198.5 million to USD 322.1 million compared with the same period of the last year. The increase in net cash balance was mainly due to the higher net cash generated from operating activities and a lower dividend payment compared with the last financial year. This offset the advance payment for the acquisition of certain assets from Gigaset as well as the unfavorable foreign currency exchange movement on the gross net asset as a result of the depreciation of the foreign currencies against the U.S. dollar during the financial year. That's my presentation. I would now invite Mr. Andy Leung to share with you our operations review. Mr. Leung, please.

Thank you, Shereen. Welcome to all of you joining us today. We will begin the review of operations by looking at costs. The gross profit margin in the financial year 2024 was 29.6% as compared with 28.3% in the previous financial year. The improvement came as freight charges and inventory provision reduced. Direct labor costs and manufacturing overheads also declined because of increased automation, reduction in factory workforce and the depreciation of the RMB against U.S. dollar. Despite lower material price, cost of material as a percentage of group revenue went up because of a change in product mix. This offset part of the improvement in the gross profit margin. Looking now to our performance by region. We begin as usual with North America. Group revenue in North America decreased by 6.3% to USD 922.6 million as lower sales of electronic learning products and telecommunication products offset an increase in contract manufacturing services. North America remains our largest market, accounting for 43% of the group revenue. ELP's revenue in North America decreased by 11.1% to USD 415.9 million. Sales decreased in both the U.S. and Canada due to demand from customer was lower and the toy markets contracted. Stand-alone and platform products both registered lower sales. And both the VTech and LeapFrog reported lower in revenue. Despite these challenges, VTech retained its leadership in electronic learning toys from infancy through toddler to preschool in the U.S. and Canada in the calendar year 2023. In the stand-alone products, at VTech, higher sales of the Go! Go! Smart family of products, preschool, product, Switch & Go Dinos and the Kidi line was insufficient to offset lower sales of infant products, KidiZoom camera, Marble Rush and eco-friendly toys. LeapFrog managed to achieve higher sales of eco-friendly toys, the successful rollout of Magic Adventures telescope contributed additional revenue. However, this was offset by lower sales of infants, toddler and preschool products, LeapLand Adventures and Magic Adventures Microscope. Platform products also saw a decline for both brands. The decrease at VTech was due to the lower sales of KidiZoom Smartwatch, KidiBuzz and Touch & Learn Activity Desk. The decline at LeapFrog was a result of lower sales of educational tablets, interactive reading systems and Magic Adventures Globe. Subscriptions to LeapFrog Academy also declined. Telecommunication product revenue in North America reduced by 16.2% to USD 201 million, with a decline in all the 3 major product categories. Growth in Canada was offset by a decrease in the U.S. Our continuous market contraction saw sales of residential phones decline. Reduction in shelf space from a major U.S. retailer led to lower sales of AT&T branded phones. During the financial year, VTech maintained its leadership position in the U.S. residential phone market. Commercial phones registered an overall sales decline. There were higher sales of hotel phones and Snom branded SIP phones, but this was unable to offset declines for headsets and multiline analog phones. The group revitalized its go-to-market strategy for SIP phones, driving the sales increase in this product line. A range of Snom D7 desksets designed for hotel administration led to the growth in hotel phones and new thermostats for the home channel also started to make a sales contribution. The decline in headsets was due to a customer placed fewer orders. Sales of multiline analog phone decreased as the product makes the transition to a new generation. Sales of other telecommunication products also declined. Baby monitors saw sales decrease due to keen competition. A reduction in orders led to power -- lower sales of CareLine residential phone and IADs. We launched several important new products during the financial year, including a Smart Baby Monitor that use AI to provide sleep analytics and real-time alerts. In financial year 2024, the group maintained its #1 position in the baby monitors market in the U.S. and Canada. CMS revenue in North America increased by 11.1% to USD 305.7 million in the financial year 2024. The main driver was professional audio equipment. Power amplifiers, mixers and wireless microphones benefited from improved material supply, clearing the accumulated backlog orders. The full revival of music concert and related activity following the pandemic, along with the new product launches, further increased demand for such equipment. Sales of IoT products were boosted by a new customer in the field of smart home control systems. By contrast, sales of industrial products decreased as order for printed circuit board assembly for coin and note recognition machine reduced. Solid-state lighting also experienced a decline as a slowdown in construction activity reduced the demand for LED lighting. I turn now to Europe. Group revenue decreased by 3.1% to USD 888.3 million as lower sales of ELPs and telecommunication products offset an increased at CMS. The regions accounted for 41.1% of group revenue. ELP revenue in Europe reduced by 4.4% to USD 315.6 million with declines in both stand-alone and platform products. Sales reduced in all key markets, including France, the U.K., Germany and Spain. We nevertheless remain the #1 infant and toddler toy manufacturer in France, the U.K., Germany, Spain and the Benelux countries in the calendar year 2023. For stand-alone products, the sales decrease came as growth in LeapFrog product was unable to offset the decline for the VTech brand. At LeapFrog infant, toddler and school products saw higher sales, offsetting a decrease in LeapLand Adventures. Sales of Magic Adventures Microscope and eco-friendly toys were stable. The successful launch of Magic Adventures Telescope in key European markets contributed incremental revenue. At Vtech preschool products, electronic learning ads and Marble Rush recorded higher sales. These gains, however, were insufficient to offset lower sales of infant products, the Go! Go! Smart family of products, KidiZoom camera, the Kidi line, Switch &Go Dinos and eco-friendly toys. Platform products saw lower VTech sales as children's educational tablets, KidiZoom Smartwatch, the KidiCom range of products and Touch & Learn Activity Desks -- the KidiCom range of products and Touch & Learn Activity Desks all declined. By contrast, sales of LeapFrog products improved, driven by Magic Adventures Globe. The sales of interactive reading systems were stable. Revenue from telecommunication products in Europe decreased by 19.9% to USD 77.2 million as residential phone, commercial phones and other telecommunication products all reported declines. Sales of VTech residential phones improved as the brand expanded into France and Italy. The growth was further supported by increasing sales in the U.K. and Germany. This was offset by lower shipment to ODM customers who were facing over inventory. The decline in commercial phones came at the sales of Snom branded SIP phones and hotel phones trended lower. Inflation and high interest rates led to reduced business investment in Europe, affecting demand for SIP phones and hotel phones. Countering the overall decline, the latest SIP desksets have been well accepted by market despite their premium price point. Building out the Snom desktop offering further, the multi-cell M500 mobility system was launched in February this year. In hotel phones, to target further growth, Snom Technology has been appointed as an additional sales channel for us in continental Europe. In other telecommunication products, growth in baby monitors was insufficient to compensate for a drop in CareLine residential phones, CAT-iq handsets and IADs. This decline came as ODM customer reduced orders for over inventory. Nonetheless, VTech and LeapFrog baby monitors made good progress in the U.K., strengthening our position at the #1 baby monitor brand in the country. CMS revenue increased by 1% to USD 495.5 million. Medical and health products, communication products and smart energy storage systems saw higher sales, offsetting decline in hearables, professional audio equipment, IoT products and automotive products. Sales of home appliance were stable. Medical and health products reported growth as hearing aids customers launched new products and gained market share. Sales of hair removal products were stable. In communication products, wireless router sales improved as the customer built up inventory to prepare for moving production to a new location. This goal was further supported full gaining market share by VTech. Sales of energy storage system ramped up as the customer captured market share following new product launches. Sales of hearables decreased. This was a result of customers headset for mobile phone reached the end of their life cycle. Sales has set for commercial use returned to normal levels after the pandemic. Although a new customer was added, professional audio equipment reduced as orders for home audio interface products declined. IoT products saw lower orders for smart meters as the customer lost market share. Orders for Internet-connected thermostats and air conditioning controls declined as demand returned to normal level after the energy crisis in Europe. Sales of automotive products were lower because of the delayed launch of new EV chargers by customer. The customer also lost market share as a result of key competition. Sales of home appliance held steady. I will now turn it over to King for the rest of the presentation.

Thank you, Andy. Good afternoon, ladies and gentlemen. Group revenue in Asia Pacific increased by 0.6% to USD 317 million. Lower sales of ELPs and telecommunication products were offset by increase in CMS. The region accounted for 14.8% of group revenue. ELP's revenue for the region decreased by 11.3% to USD 70.4 million. Higher sales in Mainland China were offset by declines in Australia and Japan. In Mainland China, both online and off-line channels posted sales increases. Growth was driven by core learning products and a revamped Go! Go! Smart Wheels line. Sales in Australia decreased for both VTech and LeapFrog branded products as consumer sentiment was dampened by relenting inflation and high interest rates. Despite this, VTech maintained its #1 position in the infant and toddler toys category. In Japan, sales were weighed down by reduced sell-through of smart watches jointly developed with a local partner and by lower shipments to a major toy retailer. Telecommunication products revenue in Asia Pacific decreased by 25% to USD 21.3 million. Sales were lower in Australia, Japan and Hong Kong. In Australia, both residential phones and baby monitors reported declines. In Japan, sales of residential phones to an ODM customer fell due to over inventory. In Hong Kong, sales declined for IADs and residential folks. CMS sales in Asia Pacific grew by 8.7% to USD 226 million. It was driven mainly by DJ equipment. The CMS facilities in Malaysia also benefited from strong demand growth from existing customers seeking supply source diversification. Medical and health products declined on lower sales of diagnostic ultrasound systems, resulting from over inventory. This was compounded by a delay in a new product launch. Communication products also dropped. Sales of marine radios were down as customers moved some production back in-house to Japan, following weakness of the Japanese yen. Finally, other regions, which comprises Latin America, the Middle East and Africa. Revenue fell by 29% to USD 17.1 million, due primarily to lower sales of ELPs and telecommunication products. Other regions accounted for 4.8% of group revenue. ELP's revenue decreased by 17.1% to USD 8.7 million. All 3 regions reported lower sales. Telecommunication products revenue was down by 38.2% to USD 8.4 million. Sales declined in Latin America, the Middle East and Africa. CMS revenue in other regions is immaterial. This concludes our operations report. Before sharing our outlook, we would like to share a few comments regarding our recent acquisition. On April 5, 2024, we completed the asset acquisition of Gigaset Communications, GMBH, a German brand with over 30 years' history and a global leader in communications technologies. These assets were related to the development, production and sales activities of Gigaset's businesses in DECT phones, business telephony solutions for enterprise customers and Android-based smartphones. The preliminary purchase price was EUR 27.5 million. The transaction was funded by internal resources. This acquisition is highly complementary to VTech's telecommunication products business. In residential phones, Gigaset is the market leader in DECT phones in Europe, whereas VTech is the #1 supplier in the U.S. Following this acquisition, VTech is elevated to global leadership in this category. In commercial phones, Gigaset's product range focuses on multi-cell systems, complementing Snom's desksets. As for Gigaset's smartphone products, they extend Vtech's business to a completely new area. Gigaset has a comprehensive sales network covering all European markets, complementary to VTech's strength in North America. The acquisition gives us our first manufacturing facility in Europe through Gigaset's highly automated factory in Bocholt, Germany. This is augmented by R&D facilities in Germany and Poland. We are confident in effectively integrating and unlocking the value of these new assets, thereby generating sustainable and profitable growth over the long term. And now to our outlook. Inflation and high interest rates continue to weigh on consumer sentiment and business investment in North America and Europe. At the same time, geopolitical conditions are increasingly uncertain. Despite these challenges, higher revenue is expected for the financial year 2025. ELPs will grow with the launch of new products, while telecommunication products will benefit from Gigaset's immediate contribution. CMS revenue is expected to hold steady. Profitability is forecast to improve as a result of increased revenue, stable costs and a more favorable product mix. Little change is expected for the cost environment in the financial year 2025. Owing to weak global demand, cost of materials is forecast to remain stable. Labor costs and manufacturing overheads are holding steady. There is currently little pressure for wage increases in Mainland China and the renminbi remains weak. These factors will offset an increase in freight charges, which have already risen due to instabilities in routes through the Middle East. On to our 3 businesses. Driven by new product launches and enhanced merchandising management, the ELP business is expecting revenue growth for both the U.S. and European markets. New VTech and LeapFrog products in the core learning categories, KidiZoom Smartwatch, KidiZoom cameras and the Magic Adventures line will drive growth. In Asia Pacific, sales in Australia is focused to stabilize. Positive momentum in Mainland China is expected to continue, with increases in both off-line and online sales. Globally, in view of the challenging operating environment, our marketing campaigns will be even more targeted, and our inventory management more stringent. With Gigaset immediate top line contribution, sales of telecommunication products is forecast to increase. Integrating Gigaset's businesses into our global R&D, procurement, manufacturing, sales and marketing as well as logistics operations is our top priority for the financial year 2025. Following the integration, the telecommunication products business will be organized into 3 categories, namely residential phones, commercial phones and smartphones as well as other telecommunication products. We target to complete the integration by the end of 2024. With the addition of the Gigaset brand as well as the sales network covering all European markets, sales of residential phones will return to growth. We will further expand the Gigaset product line, driving up its residential phone business and market share. For commercial phones, driven by new product launches, sales of Snom branded commercial phones will increase. Gigaset multi-cell systems will be augmented by Snom's SIP phones. Hotel phones will also contribute to growth as the positive momentum continues and VTech gains market share. Gigaset's Android-based smartphones, meanwhile, adds a new domain to our product portfolios. In other telecommunication products, building on the success of our first baby monitor with AI features, we will launch a second-generation version with additional advanced functionalities. CMS revenue is expected to stay stable. Facing economic uncertainties, customers have turned conservative in managing inventory and tight in placing orders. Sales of key product categories are forecast to remain stable. Growth is expected in smart energy storage systems as the customer is launching new products and gaining market share. Sales of hearables will be negatively impacted by lower demand. To prepare ourselves for future growth, to drive to globalize our production base will continue. Due to strong demand from existing customers, we plan to increase the manufacturing space at our current Malaysian facilities. In Mexico, the factory is on track to offer full turnkey EMS capability commencing June 2024. We will also begin assessing the implementation of Industry 4.0 in our Malaysian and Mexican facilities. Thank you. This concludes our presentation. We turn now to your questions.

Thank you, King. [Operator Instructions]

Thank you, management. Congratulations to the earnings. And also very considerate with the dividend for the final year. I actually have a few questions in mind. So I can see that CMS continue to be the growth driver for the group, but were you expecting that revenue to stay stable for the coming year? Just want to get a comment from the management. Is it because of capacity constraints? Or is it because of just a very stable demand that we are seeing from the order book? That's my first question.

Andy?

Yes. The major global contract manufacturing service in fiscal year '24 was mainly due to the clearing of the backlog order as a result of the improvement in global supply of electronic component. So the -- for the fiscal year '25, we forecast the performance will be stable just because after clearing the backlog order, most of the customers, they have been substantially built up their inventory. And at the same time, the -- we have a few customers still being affected by the COVID situation. And during COVID, the hearable headset, they have benefited from the work-from-home situation. So they improved their revenue during the COVID. But right after COVID, it returned back to normal. And another customer come for professional audio. They -- the home use audio interface device was also benefited from the work-from-home situation. But right now, once the COVID is over, their performance also back to normal. And this is -- in other words, after going to -- for last year due to the clearing of the backlog order, everything we just back to the normal situation.

Just a follow-up question on the CMS. Then is there like a figure that we have in terms of utilization of the capacity of the CMS group, where are we at? We're not at 100% yet, right?

The overall capacity at CMS, we are at around 75%. And we have additional capacity in both Mexico and also Malaysia. And as a result of the geopolitical situation, I mean, the tension between U.S. and China, a few customers, they are requesting production change from China to overseas. So we have excess capacity in China at the present moment. And those at capacity in Malaysia and Mexico, they are really built and we still have plenty of capacity over there. in the near future, I can't see there's any constraint in capacity.

Okay. That's very good to know. My second question is about the group outlook. I see that we expect the profitability to improve. But if we're really looking at the cost, everything seems to be -- remain stable. So I want to get more color in terms of where that profitability the company is seeing -- where does it generate it from?

Maybe I can ask Shereen to perhaps give you some color.

So in our FY '24 financial year, the GP margin actually has already improved from 28.3% to 29.6%, which is an improvement of 1.3 percentage points already. And then in the coming year, we also can see that the material prices continue to decline and the renminbi also continues to depreciate against the U.S. dollar. And these are the major reasons why we expect the coming years, our profitability will continue to improve or at least keep a stable trend compared with the FY '24 financial year. Yes.

Okay. That's very clear. Sorry. My last question is regarding the Gigaset. I see that Gigaset also have a product line of smartphone. Is it possible you can have a disclosure on, for example, how many units of smartphone they have shipped out or they have sold prior to our acquisition? Is there such a figure?

No. Okay. Maybe I can answer this question. We normally don't disclose individual smartphone figures. The smartphone Gigaset is focusing on is on some vertical markets, whether go in terms of commercial, basically commercial applications and business-to-business applications, where they need specialized smartphones like waterproof, rockiness and replaceable batteries. So we will continue to focus on this vertical market. The business is -- we -- it's not huge. But there, we see that there are quite a bit of potential in growing this business.

Thank you. Congratulations, again.

Thank you.

The second question. Yes, come from Eric Lau from Citi.

Thank you. Thank you, management, for the presentation and really appreciate for the generous dividend distribution. And can I have a couple of questions about TDL? The first one is you mentioned you expect the positive growth for the TL sales in FY '25, but mainly because of Gigaset, -- but if stripping out Gigaset in terms of the organic growth, do you expect positive growth? That's number one. Number two is, can you remind us why the commercial phone down significantly in FY '24 because of the corporate CapEx cut, another the economic slowdown or just the channel destocking? Because I would like to gauge how long is this down cycle. And now do you see the sales recovery, say, for the first half FY '25 based on the order -- I mean, the commercial phone, yes? Because I also follow [ Eling ]. Actually, they post very strong first Q sales growth because of the end of channel [e-stocking ] in last year. So I don't know whether you also get the same momentum, right, for the commercial phone. And sorry, last one for the phone is we see the Gigaset, the EBITDA margin [ PD-Fin ], say, in FY '23, or even the recent year. My question is, I know last time over the briefing, you said you probably keep the manufacturing facilities, right, for Gigaset? But how you guys can turn around or improve the margin, like what VTech is delivering for TL segment right now? How to improve the margin going forward for Gigaset?

Yes. Maybe I can answer your question. Maybe Shereen can supplement. Now the -- our telecommunication division mainly focus on 2 things. One is residential phones, which is a structurally declining market. And the other is new businesses, which consists of commercial phones and baby monitors. Because our residential phone still accounts for a large part of our total business and is declining double digits per year. So our total telecom business is declining. Our idea, of course, is to have the commercial -- the growth in the commercial and new businesses to offset the decline in the residential phones. But because of the decline is higher than what we have expected and the growth in the new businesses is not as high as expected. So overall, telecommunication is still in decline. Now of course, with the consolidation of Gigaset's businesses, it would immediately have a boost in the revenue. In the residential phone side, which is also the majority of the Gigaset business for the time being, we will immediately become the world leader. And also, we can help grow that part of the business of Gigaset because of the cost structure of Gigaset, they are not able to compete on certain markets and certain product areas. And with the help of VTech, they can go into those areas where in the past, they cannot. On the commercial side, on the commercial side, they are the leader in commercial in the area of multi cell. And on that part, it complements our commercial phones in that we can help to increase the sales of those by complementing with the Snom desksets. And as to how we can improve the margin of Gigasets because they are losing money, why we are, why we can actually make the business profitable. I think in several areas. One being, as I said earlier, we can go into areas that Gigaset is unable to go into because of their cost structure. Second thing is on the procurements because now that they are integrating with the VTech procurement and the quantity is much higher, so we can get a more favorable pricing on the procurement. And also the third is on the cost structure because of the organization structure. Because a lot of the infrastructure can be simplified and streamlined because of the consolidation with VTech. So we will expect Gigaset to immediately contribute to the profitability of the total telecom division for the first year. Maybe if Shereen have anything to supplement on this point?