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Edited Transcript of 303.HK earnings conference call or presentation 20-May-19 10:59am GMT

Full Year 2019 Vtech Holdings Ltd Earnings Call

New Territories May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of VTech Holdings Ltd earnings conference call or presentation Monday, May 20, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Corinna Chan

Vtech Holdings Limited - Senior Corporate Communications Manager

* Hon Kwong Leung

VTech Communications Ltd. - CEO and Executive Director

* Ka Hung Tong

Vtech Holdings Limited - Group CFO

* King Fai Pang

Vtech Holdings Limited - President & Executive Director

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Presentation

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Corinna Chan, Vtech Holdings Limited - Senior Corporate Communications Manager [1]

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Good afternoon, ladies and gentlemen, and welcome to all of our viewers online. Today, VTech Holdings Limited is announcing its results for the year-end -- for the financial year-end 31 March 2018 -- 2019. For your reference, the webcast of this announcement, accompanied by the presentation you will see shortly, will be available on VTech's website starting at 10:30 this evening, Hong Kong time.

Here to present the results, on my left are 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; Ms. Shereen Tong, Group Chief Financial Officer.

First of all, Ms. Tong will present the group's financial performance. Next, Mr. Leung will review the group's operations. Mr. Pang will then give the management's outlook for the coming year. We will finish our presentation with a Q&A session.

May I invite Ms. Tong to open today's presentation, please?

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Ka Hung Tong, Vtech Holdings Limited - Group CFO [2]

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Thank you, Corinna. 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 2019 compared with the same period of the last year. As you see from the slide, the revenue of the group rose by 1.5% to USD 2,161.9 million. The increase in revenue was mainly driven by the higher sales in Europe and Asia Pacific, which offset the decrease in revenue in North America and Other Regions. The gross profit of the group, however, reduced by 9.3% to USD 636.4 million, and our gross profit margin also reduced from 33% to 29.4%. The decrease in gross profit and gross profit margin was mainly attributable to the product mix and higher material prices. The direct labor costs and manufacturing overheads were also higher than the same period of the last year due to the higher wages in China, which offsets the positive impact on further productivity gains.

Our operating profit reduced by 16.5% to USD 193.2 million, and our operating profit margin also reduced from 9 point -- from 10.9% to 8.9%. The decrease in operating profit and operating profit margin was mainly due to the decrease in gross profit and gross profit margin, which offset the reduction in total operating expenses.

Our operating profit for the financial year 2019 also included gain on disposable of tangible asset.

Our profit attributable to shareholders reduced by 17% to USD 171.3 million, and our net profit margin also reduced from 9.7% to 7.9%.

As a result, our basic earnings per share reduced by 16.9% to USD 0.692 (sic) [USD 0.682] and our Board of Directors has proposed a final dividend of USD 0.15 (sic) [USD 0.5] bringing the total dividend per share for the year to USD 0.67.

Turning to the revenue by region. North America remains the largest market of the group, accounting for 46% of the group's revenue. Our sales in North America reduced by 4.5% to USD 994.5 million. The decrease in revenue was mainly due to the lower sales of our telecom products and contract manufacturing services, which offset the higher sales of our electronic learning products.

Our sales in European market rose by 4% to USD 882.9 million. It was mainly due to the higher sales for contract manufacturing services, which offset the lower sales of our electronic learning products and telecom products. In Asia Pacific region, the revenue of the group rose by 26.1% to USD 248.6 million. The increase in revenue was mainly due to the higher sales of our electronic learning product and contract manufacturing services, which offset the lower sales of our telecom products.

Other Regions include Latin America, Middle East and Africa. The group's revenue in Other Region reduced by 16.3% to USD 35.9 million. The decrease in sales in Other Regions was mainly due to the decrease in sales of our telecom product and electronic learning product, which offset the higher sales of our contract manufacturing services.

Our stock balance as of 31st of March 2019 increased from USD 349.9 million to USD 369.9 million. Our stock turnover days however shortened from 102 days to 100 days compared with the same period of the last year. The highest stock level was mainly due to the increase in our in-house productions of the Snom products and the increased demand of the group's product in the first quarter of the financial year 2020.

Our trade debtor balance as of 31st of March 2019 decreased from -- decreased by 0.7% to USD 263 million. And our stock turn -- our trade debtors turnover day maintained the same as 65 days.

Our financial position remains very strong. We were debt free. And our net cash balance as of 31st of March 2019 was USD 237 million, a decrease of 6.8% compared with the same period of the last year. The decrease in net cash balance was mainly include the payment for the acquisitions of the manufacturing facility in Malaysia as well as the higher dividend payment as compared with the same period of the last year. That's all of my presentation. I will now invite Mr. Andy Leung to share with you our operations review. Mr. Leung, please.

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Hon Kwong Leung, VTech Communications Ltd. - CEO and Executive Director [3]

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Thank you, Shereen. Good afternoon, everyone. I want to start by looking at the cost of operation. The gross profit margin of the group declined from 33% in the fiscal year 2018 to 29.4% in the fiscal year 2019. The decrease was due to a higher material price, which in part result from tight supply of certain components, product mix and a rise in direct labor costs and manufacturing overheads. The trade tension between China and U.S. is something on everyone's mind at the moment.

During the fiscal year 2019, the U.S. government began to impose additional tariffs on Chinese imports. In total, around USD 250 billion of goods from China to U.S. were subject to additional tariffs, ranging from 10% to 25%.

On May 10, 2019, the tariffs on USD 200 billion of Chinese imports were raised from 10% to 25%. Negotiations have been underway regarding the trade arrangements between the 2 countries. So far, none of our electronic learning products or telecommunication product is subject to such tariff.

However, a number of our CMS customers in the U.S. are affected. Some of them are making plans to move part of their production from our manufacturing facility in Mainland China into the production facility that we recently acquired from Pioneer in Malaysia. Despite this, there was little impact on the group revenue in the fiscal year 2019.

Turning now to our operation. Beginning with North America. Group revenue in North America increased (sic) [decreased] by 4.5% to USD 994.5 million in the fiscal year 2019, as higher sales of the electronic learning products was offset by lower revenues of telecommunication products and CMS.

North America was the VTech's largest market, accounting for 46% of the total group revenue.

Electronic learning products revenue in North America ramp up by 4% to USD 476.6 million, with particularly strong growth in Canada. The performance was achieved despite the closure of Toys"R"Us in the U.S., as some of our existing customers expanded their shelf space and assortment of toys to capture the business previously conducted by the retailer. The group also increased sales to some second-tier retailers. Additional momentum came from the launch of new VTech and LeapFrog brand products. This were well received by the market and enabled the group to gain further market share. As a result, VTech strengthened its position as the #1 manufacturer of electronic learning products from infancy through toddler and preschool in the U.S.

Standalone products posted growth, driven by higher sales for both the LeapFrog and VTech brands. LeapFrog standalone products saw growth, as we pursued strategy to expand the brand standalone toys business by launching more new products.

Among the new items launched, Learning Friends 100 Words Book, Storytime Buddy and Go-with-Me ABC Backpack sold particularly well. Growth of VTech standalone products was driven by higher sales of preschool products, such as PJ Masks Learning Watch range, Kidizoom Camera and the Kidi line. These successes offset the decline in Go! Go! Smart family of products.

Sales of platform products decreased. VTech platform products registered a sales increase, driven by strong sell-trough of Kidizoom Smartwatch DX and KidiBuzz. LeapFrog reading systems also saw higher sales, driven by the high -- good performance of the newly launched LeapStart 3D. These gains, however, were insufficient to offset lower sales of children's educational tablets. Subscriptions to the LeapFrog Academy continued to grow steadily.

Telecommunication products revenue in North America decreased by 19.4% to USD 263.4 million, with lower sales of residential phones, commercial phones and other telecommunication products.

Residential phones were again affected by the continuous contraction of the fixed-line telephone market. The group also faced keen competition and a trend among retailers to consolidate their suppliers, leading to a loss of shelf space in club and consumer electronics channels. Despite this, VTech maintained its leadership position in the U.S. residential phones market.

Commercial phones and other telecommunication products reported sales decline, as higher sales of headsets and hotel phones were insufficient to offset lower sales of VoIP phone, baby monitor and wireless monitoring systems. Headsets benefited from the launch and strong sell-through of the world's first 100 (sic) [100%] voice-controlled headsets by a customer. Hotel phones maintained their growth as the group won more new projects.

Sales of VoIP phones decreased mainly due to a product delay. Baby monitors experienced an overall sales decline as a customer reduced orders. However, in the calendar year 2018, our VTech brand baby monitors continued to grow and the group is the #1 baby monitor brand by dollar sales in the U.S. Wireless monitoring systems were affected by lower sales of Wi-Fi IP cameras.

CMS revenue in North America declined by 0.5% to USD 254.5 million. Higher sales of industrial products and medical and health products were offset by lower sales of solid-state lighting and communication products.

Sales of professional audio equipment remained stable. Industrial products benefited from increased orders for printed circuit board assembly for note-counting devices and industrial printers. Sales of medical and health products went up due to more orders for healing aids. Solid-state lighting was affected by keen competition faced by the group's customers. Communication products declined as the customer's product line reached the end of its life cycle.

Turning now to Europe. Group revenue in Europe increased by 4% to USD 882.9 million in the fiscal year 2019, as higher sales of CMS offset lower revenues of electronic learning products and telecommunication products. Europe remained VTech's second largest market, accounting for 40.8% of the group revenue.

The electronic learning products revenue in Europe reported a 5.4% decrease to USD 343.5 million. All major European markets reported lower sales. This was mainly due to the tough market conditions in most of VTech's key European markets.

In the U.K., Toys"R"Us closed all its stores. In other European markets, some retailers faced financial problems. In the U.K., toys -- logistics issues in continental Europe in the first half of the fiscal year 2019 resulted in a lower sales products, also contributed to the lower sales.

However, we successfully resolved the logistics issues in the second half of the fiscal year, enabled to recover most of the sales lost. In the calendar year 2018, VTech maintained its position as the #1 infant and toddler toys manufacturer in France, the U.K. and Germany.

In standalone products, sales of VTech brand products were down across due to the tough market conditions and the logistics issues. The sales of LeapFrog brand products remained stable.

During the fiscal year 2019, a brand new range of interactive buildings sets called LeapBuilders or BlaBla Blocks was launched in our major European markets. The launch marked VTech's expansion into the building set category.

In platform products, sales were lower for both the LeapFrog and VTech brands. VTech saw higher sales of Kidizoom Smartwatches, augmented by the launch of the upgraded version of Touch and Learn Activity Desk.

Continuous growth in LeapFrog reading systems was supported by the launch of the LeapStart 3D in the U.K. market. These gains, however, were insufficient to compensate for lower sales of KidiCom Max and children's educational tablets.

Revenue from telecommunication products in Europe decreased by 9.8% to USD 119.7 million, as sales of residential phones, commercial phones and other telecommunication products decreased. Residential phones saw sales decline as the major line telephone market contracted further.

Commercial phones and other telecommunication products had mixed results. VoIP phones continued to expand, supported by a positive reception from customers on the new series of products under the Snom brand. Sales of hotel phones were stable. Other telecommunication products, namely baby monitors, CAT-iq handsets and integrated access devices saw sales decline, as orders from customers reduced.

CMS revenue in Europe increased by 18.8% to USD 419.7 million. Growth was seen across the Board, driven by higher sales of hearables, professional audio equipment, industrial products, home appliances and communication products. The growth in hearables were -- was strong, driven by the market share gains as the group took over orders from competitors. The growth was further supported by new product launches and good sell-through of products by existing customers. Professional audio equipment benefited from new products launched by existing customers.

The shift towards smart homes continued to benefit the industrial products category. There were more orders for internet-connected smart thermostats and air-conditioning controls. The growth in U.K. was due to the introduction of a new generation of smart meters. In home appliances, growth was driven by increased demand for electric ovens in Italy and market share gains by a major customer in Russia.

Higher sales of communication products were driven by more orders for network routers from an existing customer.

Group revenue in Asia Pacific increased by 26.1% to USD 248.6 million in fiscal year 2019. Higher sales of electronic learning products and CMS all offset lower sales of telecommunication products. Asia Pacific represented 11.5% of the group revenue.

Revenue from the electronic learning products in Asia Pacific ramp-up by 12.9% to USD 81.2 million, as growth continued in Mainland China and Australia.

Higher sales of LeapFrog brand products in other Asia Pacific markets also supported the overall growth. In Mainland China, the increase in revenues resulted from continued sales increase for infants and toddler products, new product launches and channel expansion. Among the new items introduced, the new KidiSchool line was introduced to target the early education segment was especially well received. Higher penetration among maternity-infant-child specialty retailers and e-commerce retailers also contributed to the growth.

In addition, the group benefited from continued expansion of Toys"R"Us in the country. In Australia, sale continues to grow. Higher sales were seen in both VTech and LeapFrog products through broader listings and a focus on improving channel management.

Telecommunication products revenue in Asia Pacific decreased by 19.9% to USD 35.4 million, as lower sales in Japan, Australia and Hong Kong offset growth in Malaysia.

In Japan, sales declined due to reduced shipment of cordless phones to a customer who faced financial difficulties. In Australia, the continued contraction of the fixed-line telephone market brought to lower sales of cordless phones, offsetting growth in baby monitors. Hong Kong saw sales decrease due to decline in demand for cordless phones and lower orders for integrated access devices.

On the other hand, Malaysia experienced growth, as VTech became a key supplier for cordless phones of a major local telephone company.

CMS revenue in Asia Pacific ramp up by 63% to USD 132.0 million, higher sales of professional audio equipment, medical and health products and home appliances were reported. This offset lower sales of communication products and hearables. The growth in professional audio equipment was due to the addition of sales from the DJ equipment business, following the completion of acquiring the manufacturing facility in Malaysia from Pioneer in August 2018.

This resulted in a full 6-month sales contribution being consolidated in the second half of the fiscal year 2019. The growth in home appliances was a result of additional revenue generated by a new customer. Medical and health products continued to benefit from higher orders for diagnostic ultrasound systems. Sales of communication products declined as a result of reduction in orders for marine radios. Hearables were affected by keen competition in the wireless headsets market.

Finally, Other Regions. Group revenue in Other Regions, namely Latin America, the Middle East and Africa, fell by 16.3% to USD 35.9 million in the fiscal year 2019. Lower sales of telecommunication products and electronic learning products offset higher sales of CMS. Other Regions accounted for 1.7% of the group revenue.

The electronic learning products revenue in Other Regions decreased by 7.1% to USD 13 million, with higher sales in Latin America unable to compensate for lower sales in Middle East and Africa.

Telecommunication products revenue in Other Regions declined by 21.9% to USD 21.7 million, with lower sales in Latin America, the Middle East and Africa.

CMS revenue in Other Regions was USD 1.2 million in the fiscal year 2019 as compared to USD 1.1 million in the previous fiscal year. This concludes my part of the presentation.

I'll now hand over to King for the outlook. King, please?

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King Fai Pang, Vtech Holdings Limited - President & Executive Director [4]

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Thank you, Andy. Good evening, ladies and gentlemen. In this final part of our presentation, I'll share our outlook for the fiscal year for the group. Group revenue for the financial year 2020 is difficult to gauge, as new tariffs may potentially be levied on all Chinese imports into the U.S. VTech is assessing the impacts and taking mitigating steps, which include expanding our newly acquired production facilities in Malaysia.

On the other hand, the pressure on material prices is forecast to abate and labor costs is expected to remain stable. These 2 factors will potentially affect group's gross margin.

ELPs. In the electronic learning products, we aim to strengthen our market leadership in North America and Europe through new product introductions.

For standalone products, this will be led by the expansion of our core learning products, under both the VTech and LeapFrog brands.

In North America, we will begin to sell our first robotics toys, Myla the Magical Unicorn. This product has already been introduced into group's key European markets last year.

Under the LeapFrog brand, the LeapBuilders line will be introduced in the U.S., following its positive reception already in Europe.

Platform products. We'll also see several new platform products launched in the financial year 2020. For the LeapFrog brand, there is RockIt Twist, a brand new handheld gaming device for children aged between 4 and 8. The LeapStart range will be strengthened by the addition of LeapStart Go. For the VTech brand, a new version of KidiBuzz, or in the Europe, KidiCom Max will be introduced in the U.S. and the U.K. It has a new design and comes with augmented reality games and live face-tracking photo filters.

And finally, continued growth in Australia and Mainland China is expected to drive higher sales in Asia Pacific.

For telecommunication products, our key drive is to accelerate the pace of new product introductions. Sales of commercial phones and other telecommunication products are forecast to increase. For Voice over IP phones, the rollout of new product line under the Snom brand in the financial year 2019 has laid the groundwork for higher sales this year.

A new cordless conference phone with wireless microphones will also be launched this year. And the momentum in headsets will continue as more new products are launched this year.

Further growth in hotel phones will be supported by the addition of customers in Macau and New Zealand. Sales of baby monitors, CAT-iq handsets and integrated access devices will all benefit from new product launches during this year.

In residential phones, the decline in sales is expected to slow as VTech becomes the sole supplier to some key retail customers and recoups some lost market share in the U.S.

CMS. Subject to further trade developments between the U.S. and China, CMS is on track for its 18th consecutive year of growth. Professional audio equipment will be boosted by rising sales at existing customers and the contribution of the new DJ equipment business. The strong momentum in hearables will continue. As a major customer, we'll launch a new generation of headsets and transfer its production to VTech.

Industrial products will also grow. Orders for Internet-connected smart thermostats and smart air-conditioning controls are expected to rise, as our existing customer's complete product line enters full production. The medical and health products business will benefit from the decision by a customers to manufacture the finished products of its hearing aids at VTech.

Several new initiatives will contribute to CMS drive to expand revenue and lower costs. A new product introduction center is being set up within our existing R&D facilities in Shenzhen, China. Its aim is to capture opportunities from startup companies. We are also taking steps to enhance our supply management and to secure the best level of service, especially during critical supply situations.

Thank you. This concludes our presentation.