Earnings Transcript for HOLI - Q4 Fiscal Year 2019

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for Fiscal Year 2019 and the Fourth Quarter Ended June 30, 2019. [Operator Instructions] Please be advised that this conference is being recorded today, August 15, 2019, Beijing time.I would now like to have the conference over to Mr. Arden Xia, the Investor Relations Director of Hollysys Automation Technologies. Thank you. Please go ahead, Mr. Xia.

Arden Xia: 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 Automation Technologies; and myself, of IR Director of Hollysys. On today's call, Mr. Shao will provide a general overview of our business including some highlights for the fiscal year 2019 and the fourth quarter. Mr. Steven Wang will discuss our performance from a 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 the statements that are not historical facts, including statements relating to the expected growth of Hollysys' future product introductions, 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 those set forth in the statements

Baiqing Shao: Thank you, Arden. Greetings, everyone. I would like to discuss some events during this quarter.IA business finished the fiscal year with revenue and contract at $233.8 million and $291.3 million, achieving 4.0% and 2.5% year-over-year growth, respectively. For the quarter, revenue and the new contract were $66.6 million and $83.9 million, representing 4.0% and 0.9% year-over-year growth, respectively. We continued our efforts in market penetration and addressing the demand from current customer base.Within high-end coal fire market, we signed contracts to provide DEH to Guohua Jinjie 2 units 660-megawatt and Huaneng Shengli 2 units 660-megawatt power stations. Despite slowdown in coal fire, we continued to explore opportunities in new energy and managed to maintain our leading position, especially in garbage power.In the chemical and petrochemical industry, we have optimized our team to facilitate market penetration and the comprehensive solution offering in different sub-verticals.Meanwhile, our milestone Zhong'an coal-chemical project is approaching its completion. We provided a total over 70,000 DCS control points and the execution of the project last for more than two years.Our capability has been highly praised by our client, and we believe this project will help build up our reputation as a competitive solution provider for a large-sized projects and high-end clients in the industry.The momentum of after-sales service continues, driven by the demand from the rebuilding and upgrade. We are also improving international coordination - internal coordination when connecting with our customer's base.Through visiting our customers - clients in a team of members from different product divisions, we hope to create better engagement and explore the opportunities of cross-selling.Furthermore, we are actively promoting our smart plant initiatives through direct communication with a key potential clients. as well as open marketing activities involving clients, governments and other industry players.Rail business finished the fiscal year with revenue and contract at $208.9 million and $340.3 million, recording 9.6% and 37.7% year-over-year growth, respectively. For the last quarter, revenue and contract were 68.3 - $48.3 million and $60.8 million, representing 19.6% and 4.6% year-over-year growth, respectively. We signed several contracts to providing ATP advanced maintenance to local railway bureaus.Going forward and given a visible long-term railway construction plan, we will continue to adhere to the diversity strategy for stable and healthy growth and to improve our local service network for more value-adding and differentiated services.Our urbanization - with urbanization as an ongoing process, we will keep leveraging our strong R&D capacity and prepare for the application of various types of railway transportation systems in the future.In our overseas business, M&E finished the fiscal year with revenue and contract at $127.6 million and $93.4 million, recording 1.8% year-over-year growth and 9.1% year-over-year decrease, respectively.For the quarter, revenue and contract were $42.1 million and $25.2 million, representing 1.7% and 37.0% year-over-year decrease. Given the macro economy in Southeast Asia and the Middle East, risk control remains to be the key focus of our M&E business. Going forward, we will continue our efforts in developing partnership with the key EPC players and strengthening localization in manufacturing -- manufacture, marketing and services.With that, I would like to turn the call over to Steven Wang, who will read the financial results analysis.

Steven Wang: Thank you, Mr. Shao, I would like to share some financial highlights for fiscal year and the quarter ended June 30, 2019. Comparing to the prior fiscal year, the total revenues for fiscal year 2019 increased from $540.8 million to $570.3 million, representing an increase of 5.4 -- 5.5%, integrated contract revenue increased by 0.2% to $467.4 million, products sales revenue decreased by 17.7% to $33.1 million and services revenues increased by 105% to $69.9 million.The company's total revenues by segment are as follows

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

Operator: Thank you. [Operator Instructions] The first question we have is from the line of Alex Chang. Your line is open.

Unidentified Analyst: [Foreign Language] The first question is about the fourth quarter, the gross margin compared -- decrease and but we could see the IA or rail business, the revenues side are increasing. But relative to integrated contract, the compared decrease either.So how we can understand about the gross margin and definitely within contract gross margin. The second question is about goodwill impairment and which company impacted the goodwill impairment. Thank you.

Baiqing Shao: [Foreign Language] The first question about the gross margin. The integrated contract compared decrease, this is also including the influence by the international company spinoff. And -- but the main gross margin for the whole company just come from the railway transportation. A particular project, the gross margin is actually lower. So this leads to the costly fluctuation. But for the whole fiscal year, you see the gross margin still within a stable range.

Baiqing Shao: [Foreign Language] The second question about goodwill impairment, all come from the Concord company.

Unidentified Analyst: [Foreign Language] The second question is about the goodwill impairment. Right now, we do see still have US$37 million on hand, and could you help us to distinguish what kind of company inside of the goodwill.

Baiqing Shao: [Foreign Language] The US$37 million goodwill or - I mean that may come from the Bond company.

Unidentified Analyst: [Foreign Language]?

Baiqing Shao: [Foreign Language] And in the past years, the goodwill impairment all came from the Concord. And right now, each year, we do the testing for the goodwill impairment. But right now, the Bond is still, they are stable. And no such issue, but we will continue to do the taxing each year. Thank you, operator. The next one please,

Operator: The next question we have is from the line of Jacqueline Du from Goldman Sachs. Your line is open.

Jacqueline Du: [Foreign Language] The first question is about the service revenue compare increase very fast. But -- and also, about -- could you give us our a separate proportion for each business, IA, rail and M&E sector. And what about the service proportion for each segment.And the second question about the industrial automation, the coal fire is slowing down but we do see the new energy CapEx, power is increasing. But I still want to know about the IA total revenue breaking down for each industry proportion.And the third one is about the railway transportation, from the calendar year, to see the rolling stock, still no any problems right now. And what about how weak is that for the whole calendar year about the -- procurement of the rolling stock related to ATP contracts?

Baiqing Shao: [Foreign Language] Okay. The first question about the service. We do not disclose the breakout number for each segment. But the whole after sale revenue, including service right now, around the 20% of total revenue. This is compared increasing over time. And one thing I want to make a -- clarify is about this fiscal year, we started to use the ASC 606 and this is well influenced the service contract recognized revenue method, and we changed to use the POC this time. So this also compares a little affecting the service revenue recognition.And that is to say it should be higher than the current number. But because of the ASC 606 we can ask for based on the whole period of the contract. And the second one is called the IA proportion, and currently the petrochemical and chemical takes around 40% to 45% of total IA revenue and the power take 40% to 45% and the others about 10% to 15%, and the 5% from the nuclear power.[Foreign Language] And for the railway transportation new contract, for this calendar year, we get from -- mainly from the online -- equipment and from the track side and also the service contracts. But the ATP-related rolling stock, we have no any information right now. And most probably by the CRC, they will do the procurement at end of the calendar year, so we can see the future. Operator?

Operator: The next question we have is from the line of Alex Chang from Citi. Your line is open.

Alex Chang: [Foreign Language] The question is about the subway information. We did not hear more about the subway sector update. So is there any changing for the strategic planning or what else?

Baiqing Shao: [Foreign Language] The subway business deal is steady as before. So we have no any strategic changing for this part. Alex, do you have more questions? Okay. Thank you.

Operator: [Operator Instructions] Sorry, please go ahead.

Arden Xia: Okay. Thank you, everyone, for joining us on the call today. If you haven't got the chance to raise your questions, we will be pleased to answer them from the follow-up comments. We're looking forward - okay, hold on a second, maybe we still have a question, right, operator?

Operator: The next question we have is from the line of Kevin Luo from Morgan Stanley. Your line is open.

Kevin Luo: [Foreign Language] The first question is about the fiscal year 2020 from the management perspective to say what about the new product -- what kind of new product we could provide the market and what about the influence about a new product to contribute to the revenue?And the second question about the railway transportation. Could you please distinguish about the backlog and what kind of proportion for the ATP and the maintenance and TCC?

Baiqing Shao: [Foreign Language] For the new product, we concentrate say the -- for strengthening our intellectual smarts and also our [indiscernible] investment, and this including the management diagnosis and also including the prediction for equipment including the hardware and software. And the simple like the -- industrial automation sector, we are implementing the project for the [indiscernible], the power plant. This is intellectual smart plant. And when it's finished, it could set a good representation for the customers.And also the railway transportation sector, the subway, we also used the intellectual information management. This is all come from what we dedicated the software, hardware platform. And these products, no matter the IA or rail, currently not take very large proportion of the revenue, but it will bring a very strong impact in the future.[Foreign Language] And beyond that, we also built - already constructed a team for the industrial information security, and we will provide new products in future. And also in the future, this part also gather revenue from the service and products.[Foreign Language] The railway transportation backlog, we have no breakdown number to provide, but I can give you some sense about the ATP contract, relatively compare a large percentage than the TCC on the rail track. And also the subway and the maintenance contracts still are normal. Thank you. Due to the time constraint we will now take one last question from the queue. Operator, please.

Operator: Your last question comes from the line of Joseph Qi [ph] from JPMorgan. Please ask your question.

Unidentified Analyst: [Foreign Language] The first question is about -- for the fiscal year 2020, do you have any guidance for the top line and bottom line. The second question about the IA, what are the expectations for the future proportion changing?

Baiqing Shao: [Foreign Language] The first question about the guidance. Currently, we still have no guidance. But for the coming 2020 fiscal year, we have confidence to keep the growth. And if in future, we think that the situation getting material, we will give the update for the guidance.And the second question about the proportion. The proportion in recent years have no -- very stable, have no fluctuation, changing. But we will focus from another attack to say, we'll focus the energy saving, environmental protection and also the intellectual smart industrial automation work. So this part, we believe in future will bring strong momentum.

Arden Xia: Thank you, Joseph. Thank you, everyone, for joining us on the call today. If you haven't got the chance to raise your questions, we'll be pleased to answer them through follow-up contacts. We're looking forward to speaking with you again in the near future. Thank you.

Baiqing Shao: [Foreign Language]

Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.