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Edited Transcript of 600690.SS earnings conference call or presentation 30-Aug-19 9:00am GMT

Q2 2019 Haier Smart Home Co Ltd Earnings Call

Qingdao Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Haier Smart Home Co Ltd earnings conference call or presentation Friday, August 30, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anita Sun

Haier Smart Home Co., Ltd. - Senior IR Manager

* Wei Gong

Haier Smart Home Co., Ltd. - CFO & VP

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Conference Call Participants

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* Dylan Chu

CLSA Limited, Research Division - Research Analyst

* George Hsu

JP Morgan Chase & Co, Research Division - Analyst

* Hanli Fan

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. Mr. Chu, please begin the call, and I'll be standing by.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [2]

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Thanks very much, Frankie. Good morning, good evening, and thank you all for joining Qingdao Haier First Half '19 Result Conference Call. My name is Dylan, I'm consumer analyst of CLSA. Today, it is our quick pleasure to have the management team from Qingdao Haier, including Mr. Gong Wei, CFO; Ms. Ming Guozhen, Board Secretary; Anita, IR Director as well as the financing colleagues and investor relation team colleagues are all with us today. So appreciate your time. Today, we're going to kick off with a very quick presentation of the second quarter/first half results from Anita and then we will open up for Q&A.

With that, I'd like to turn over to Anita. Anita, please.

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [3]

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Thank you very much, Dylan, and hello, everyone. Thank you for joining on this results call. And I'll go through the first half results very briefly before I hand over the line to Mr. Gong, who will be more than happy to answer all of your questions.

In the first half this year, the company managed to achieve a sales revenue of about RMB 98.9 billion and that makes 9.4% growth on a year-on-year basis ex the consolidation of Candy business. The year-on-year increase was 4.2% and gross margin was 29.1%. Again, ex-Candy and that will be 29.3%, 0.1 percentage point increase on a year-on-year basis and operating margin was 6.6%. Again, ex-Candy would be roughly 6.9%. And net profit for the period was RMB 5.15 billion, making it a 7.6% increase on year-on-year basis. Again, ex-consolidation, net profit would be RMB 5.27 billion, making it a 10.2% increase on year-on-year basis. And category-wise, we managed to achieve solid growth in almost all categories except air conditioner on a global basis. And in terms of the Chinese market, Casarte brand continued to strengthen the premium market leadership with 15% revenue growth.

And overseas market continued to deliver double-digit growth across most of the regions. That's pretty much a very brief summary of our first half results.

Now I would like to hand over to Mr. Gong, and Dylan will open for questions.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [4]

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Thank you very much for the overview, Anita, and congratulations again on the solid results.

Frankie, would you please let investors know how to raise the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [2]

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Okay. Thank you, Frankie. So while waiting for investor questions, I'd like to maybe kick off with 4 questions from my end. Since management shared all of thoughts around the strategy and business development. So I would like to focus a bit more in terms of financials and some numbers. The first question is about the first half sales and profit breakdown between Candy, GEA as well as [core] Haier business.

(foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [3]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [4]

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[Interpreted] For the first half this year revenue-wise that's RMB 4.5 billion from Candy business, RMB 27.5 billion from GE Appliances and RMB 0.7 billion from Fisher & Paykel business and the remaining RMB 56 billion from the existing Haier business.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [5]

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Just a quick follow-up since we are not in position to disclose GEA profit by dollar terms, would it be fair to assume that GEA profit margin slightly expanded a little bit during the first half, so its profit growth will be slightly higher than its sales growth, which was 12.6%, if I remember right from announcement.

(foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [6]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [7]

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[Interpreted] And that's correct. And in the first half, in the U.S. dollar terms and that is 18.6% expansion in the bottom line of GE Appliances.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [8]

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Okay. Very helpful. Second question, just regarding on the second quarter. If we focus just on second quarter on a stand-alone quarter basis, how much was Candy consolidation? And number two, excluding Candy business, how much the higher overseas business grow by? And number three, how much was GEA growth? And finally, just in terms of core domestic Haier business, could you please just remind us again the growth by category in the second quarter results?

(foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [9]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [10]

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[Interpreted] Great. Revenue-wise, in the second quarter this year, that's about RMB 2.5 billion contribution from Candy business, RMB 14.9 billion from GE Appliances and RMB 1.38 billion from Fisher & Paykel business. And our domestic gross-wise [in that business], that's 0.6% of refrigerators, 3.2% in washing machines, minus 25% in air conditioners and 16% in commercial air conditioners. Consolidated, it's minus 17% and 1.5% from kitchen appliances and 3.2% from water heaters.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [11]

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(foreign language) My third question is just in terms of forward-looking guidance for second half. Could you please maybe give us any updated guidance in terms of sales and profit outlook for the second half or for the full year? And if possible just any color in terms of region, overseas versus domestic growth as well as by category and just different category growth outlook for the second half would be very helpful.

(foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [12]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [13]

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[Interpreted] Right. And in terms of the top line guidance for the second half of this year, we are expecting the momentum to continue in the overseas market, meaning that we could be looking at double-digit growth of 10% to 15% in the second half from the overseas business.

And as of the domestic market, then according to both CMM and AV Cloud then the sector will remain under quite significant pressure in the second half with -- without any real signs of improvement. And some segments might even underperform the first half, which Haier on the other hand, will continue to aim at above industry average growth. And we are looking at mid- to low-single-digit revenue growth from fridge and washing machine categories, above industry average in air conditioners and hopefully, double-digit growth from kitchen appliances. And again, we are committed to deliver steady bottom line expansion in second half.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [14]

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Great. My final question is around cash flows. So first half, operating cash flow was affected by the seasonal weakness from the Candy businesses. Could you please tell us now roughly how much was the impact on Candy on cash flow level? And would you expect this impact to reverse in the second half? And related to cash flow also CapEx picked up a little bit as expected. Would you just please give us the updated CapEx guidance as well?

(foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [15]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [16]

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[Interpreted] And in the first half this year the cash flow of Candy business was minus RMB 870 million. But we don't actually have the first half results of Candy's cash flow in 2018. But for the full year in 2018, the cash flow from Candy was actually a positive RMB 640 million. It is expected the cash flow will improve in 2019 as a whole, which means that we are looking at a better second half this year.

And in addition, the (inaudible) increased our exposures in the home improvement market as well as the furnished apartment business. And you can gauge this particular segment roughly 6-month payment period. And again, we could be looking at better cash inflows in first half, and we are expecting a pickup starting from the third quarter. And during the first half this year -- and the investment was roughly RMB 3.6 billion, that breaks down into RMB 1.15 billion from change of management, RMB 1.9 billion in Chinese business, roughly RMB 215 million from the overseas factories and RMB 300 million from Fisher & Paykel business and Candy business. And we are expecting roughly RMB 2 billion CapEx in the second half this year, making the total RMB 5 billion to RMB 6 billion for the full year, which is in line with our guidance at the beginning of the year.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [17]

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That's all my questions. Frankie, could you please have the first questions from the line.

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Operator [18]

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(Operator Instructions) Our first question comes from Hanli Fan from Morgan Stanley.

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Hanli Fan, Morgan Stanley, Research Division - Equity Analyst [19]

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(foreign language) So I have 2 questions. The first one is on the segmental revenue for washing machines and the kitchen appliances. In the first half, you recorded over 20% year-on-year growth. I understand that the domestic demand is kind of a weak. So what's the driver for that? Which part of the overseas is the main driver for that over 20% year-on-year growth? And for my second question is net margin expansion. The overall net margin declined because revenue shift towards more overseas revenue. But if you look at different geography, what was the margin trend in each specific geographic area? So that's my 2 questions.

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [20]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [21]

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[Interpreted] Great. And then in the first half for washing machine business and that's 22% overall top line growth breaks down into 4.6% from existing China business and RMB [4.82] billion from GE Appliances. That is a 26 -- excuse me, 22.6% year-on-year increase and RMB 522 million from Fisher & Paykel business, flat top line, and consolidation of RMB 2.2 billion from Candy business. And kitchen appliances business had a revenue of RMB 13.9 billion with the top line of 23.6% and that breaks down into RMB 10.48 billion from GE Appliances [were] 15.1% year-on-year and RMB 920 million from Fisher & Paykel business was 8.1% top line and RMB 1.24 billion from Candy business and 5.5% year-on-year increase from the existing China business.

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [22]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [23]

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[Interpreted] Great. And unfortunately, I'm not actually in a position to disclose the -- either that rest of profit breakdown for different regions, but what I can share with you is the fact that overseas outgrow the China business in both the top line and bottom line figures with 20% bottom line expansion from the entire overseas portfolios and GE Appliances, then that's 20% bottom line expansion in RMB terms and roughly 18% in U.S. dollar terms.

And on the other hand, if you look at different categories, then the fridge remains our biggest profit contributor for -- by washing machine. Air conditioners, on the other hand, failed to meet our expectations in profitability.

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Hanli Fan, Morgan Stanley, Research Division - Equity Analyst [24]

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(foreign language) I have a follow-up question on the domestic net profit margin. So we have so many initiatives looking to improve our operational efficiency and increase our net profit margin. But we've done quite a lot. But in terms of the financial numbers, when could we see significant financial impact to the P&L so that we can see meaningful margin expansion. (foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [25]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [26]

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[Interpreted] Great. We started to try to consolidate the -- our back-end supporting platform from the 1st of May this year. And this particular model will be rollout on the national scale from the 1st of September and with results expected, starting to contribute to the bottom line from the first half next year and one of which will be taking care of significant reduction in inventories and improvement in the overall efficiency of the business. We could be looking at roughly 0.3 percentage point contribution to the bottom line.

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Operator [27]

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Our next question comes from [Christine Yee] from [Travis].

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Unidentified Analyst, [28]

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(foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [29]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [30]

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[Interpreted] Great. In the next half, the domestic markets that we're looking at 4% revenue growth of refrigerators with 1% from volume and 3% in air; and 3% revenue growth from washing machines that breaks down into 2% from volume and 1% coming from ASP; and minus 17% in air conditioner was minus 14% in volume and minus 3% in ASP; and plus 16% in commercial air conditioner units was roughly 8% in both volume and air; and our 5% revenue growth in water heaters was 9% volume and minus 4% in ASP; and lastly, 5% revenue growth in kitchen appliances was minus 4% in volume and 9% in ASP.

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [31]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [32]

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[Interpreted] Right. And the impact of the [team cut] in the first half was roughly 0.4 percentage point on the gross margin line. And it is expected to reach 0.9 percentage point in the second half.

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Unidentified Analyst, [33]

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(foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [34]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [35]

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[Interpreted] Right. We have started to see more improvements in the air conditioner business starting from July and August this year. And as you all know, August is the beginning of new calendar year for air conditioner business, and then we always had a pretty good start this year and was a little over 50,000 units -- orders for the Casarte brand in particular where that amount is equivalent of the entire order for the Casarte brand in the year 2018 and the entire amount for the first half in 2019.

And while we did rough -- in the first or rather what we missed in the first half this year, in terms of air conditioner, was the opportunities in particular, in material and segments. And we started to address this particular issues. And we're committed to match the whatever price that our competitors are offering and that (inaudible) requirements and demand towards the entire value chain of air conditioner business. We've started to reorganize the entire production process in order to reflect -- to reduce our cost.

And therefore, for the second half this year we are looking at a great number of new SKUs in particular to address demand coming from the mid- to low-earning segments. And also, we've really increased our exposure and coverage in the home improvement market. And this particular addition to the entire air conditioner distributor network will hopefully start to contribute in the second half.

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Unidentified Analyst, [36]

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(foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [37]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [38]

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[Interpreted] Sorry, allow me to translate the last question. And -- where we're getting the impact of the ASP and as far as margins in both the new trends and strategies for the air conditioner business with particular focus in mid- to low-end segments. And also it's been quite different patterns in ASP and the volume trend from the water heater and kitchen appliances business. From the first half this year, could you please elaborate on the reasons?

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [39]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [40]

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[Interpreted] And -- well, the short answer to your first question is, as compared to our reduction in the ASP of air conditioners is [already getting] reflected in the profitability from the first half this year. But we've actually started -- we've already started to reduce the price for the air conditioner units. Unfortunately, costs remains -- well, or rather, our efforts to improve cost and duties and improve profitability is yet to show any real impact in the first half.

We are expecting a greater impact from those measures in the second half. And as for this [quite interest] and industry trend in ASP versus volume for kitchen appliances and water heaters, again, that's a reflection of our different strategic focuses in different market landscape. Where the kitchen segment remains highly fragmented. As for now, we are focusing on the high-end segment with a particular focus, comprehensive units and we are -- and Casarte brand-wise is our focus. Therefore, then we also reduce the large number of low-end SKUs, in particular, for the aligned business.

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [41]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [42]

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[Interpreted] Great. And as for the water heater business, then we became aware of the leading up of inventories of our competitors slowed in the market. Therefore, then we now launched a large number of low-end SKUs in order to acquire low-end market shares. And the result is that our (inaudible) lost the 2 percentage market share in the high-end segment of water heaters and most of which are taken via Haier.

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Operator [43]

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(foreign language) Our next question comes from [Chen Jiang] from China Galaxy.

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Unidentified Analyst, [44]

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(foreign language)

So my first question is about the fusion of the 4 networks. So the guys from Morgan Stanley just asked about positive impact on 2020. So what I want to know is, when we're carrying out this strategy in second half, will there be any negative impact to operating metrics in second half for Haier? And my second question is, so you just mentioned about Haier faced some problems in cost control in first half. And based on what I learned, so raw material cost was actually relatively low in first half. And what do you think that's stopped Haier from taking advantage of this opportunity?

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [45]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [46]

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[Interpreted] Great. Going forward, we are not expecting a significant impact in the operating metrics from the consolidation of our -- for supporting back-end platform. And the reason that we are committed to this strategy is the fact that the expansion of the existing retail trends [those aligned of learning] to lower tier cities has started to impact our performance. Our existence of franchised stores in those particular areas and -- was there are more efficient management from a supply chain and logistics. And what we are trying to create or offer here is even better values in terms of efficiency management from this consolidated supporting platform and for our franchise stores.

And on the other hand, we are not giving up our presence and partnerships with the existing retail chains during their expansion of network. And at the moment, I suppose, our market share is anywhere between 30% to 40% in some of the stores in the lower tier regions. And the way to address this is to offer customized SKUs to address the particular demand for different channels.

Based on our estimate, the raw material contributed a total of roughly 1 percentage point on the gross margin line. Unfortunately, this sales were transferred into the bottom line because of the quite significant price competition that the industry experiences in the first half this year in order -- by appliances makers to boost the quite weak consumer momentum.

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Operator [47]

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We have another following question comes from Hanli Fan from Morgan Stanley.

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Hanli Fan, Morgan Stanley, Research Division - Equity Analyst [48]

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(foreign language) So I've noticed that you have the lower price strategy. So -- because you launched some lower-priced washing machines to the market in the first half this year, so how do you comment on your strategy in the first half? And I notice that the kitchen appliances, you may go to a premium strategy, but all the other types of subcategory in home appliances you are looking for different strategies particularly in the lower-priced region. So I just want to confirm with management if that's your strategy. And how these types of strategy can last in the future? (foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [49]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [50]

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[Interpreted] Great. Well, I suppose the short ...

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [51]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [52]

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I suppose the actual answer to your question is, we want it all. We want to consolidate our market leadership in the premium segment and without losing any in the unit or take the refrigerator as an example, then our -- we actually have internal target of the -- at least 3x the size of #2 in mid -- exceedingly low mid-to-high segment.

And at the moment, was the Casarte's advantages and then we're about 5x the size of #2 in high end. We're only about 1.5x the size of #2 in low end. So that is where we see the future growth and opportunities could come from. And Haier has always been committed to generate both the top line and bottom line expansion.

And also, more importantly, low-end SKUs does not necessary mean low margins. I suppose that's how to balance both the revenue growth and margin is -- remains the key to sustainability in the business. And even with kitchen appliances segment, and we are [gearing] up the very low-end SKUs, in particular, on the internet. And on the other hand, we're addressing the premium market demand with both Casarte and GE Appliances brand. But on the other hand, we're also offering the leader brand towards those young and trendy customers with small and compact urban living space.

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Hanli Fan, Morgan Stanley, Research Division - Equity Analyst [53]

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(foreign language) Just translating my question. So the first follow-up is about Casarte brand. So achieved 15% growth in the first half. And what's the guidance in the second half of the full year 2019? And the second follow-up is the decoration market is kind of new channel for ourselves. So what's the sales contribution from this new channel? And what's the expected size this channel can achieve in coming years? (foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [54]

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(foreign language)

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Hanli Fan, Morgan Stanley, Research Division - Equity Analyst [55]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [56]

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[Interpreted] We're looking at 20-plus percent from Casarte brand for the second half this year. And unfortunately, I don’t actually have the revenue size from the home improvement channel as of this moment as we have only just started this business only to the better position to gauge as this business grows in size.

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [57]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [58]

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[Interpreted] Well, I will try to give you an answer in next.

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Operator [59]

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Our next question comes from George Hsu from JPMorgan.

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George Hsu, JP Morgan Chase & Co, Research Division - Analyst [60]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [61]

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[Interpreted] I'll translate. Well, we're right at percentage, the 1 percentage point. They -- excuse me, improvement in gross margins coming from raw material and [some] 40 bps coming from VAT costs. And how much of this is putting -- or put back into marketing expense in the first half this year? And what would be the guidance for the second half? And then with the consolidation of GE Appliances and also Candy business, what will be the savings in each [global procurement] platform in the first and second half this year?

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [62]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [63]

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[Interpreted] Well, the -- in the first half this year, then I suppose the fact that gross margin expansion failed to translate all the order income into the bottom line is a reflection of the fact that we started to add more on the low-end SKUs, in particular, from the air conditioner business and some in the washing machine segment. And we estimate the impact will be anywhere between 60 to 80 bps and roughly 20 to 30 bps went into promotion.

And I suppose the trend in the second half, really marginally turns down the performance of the air conditioner segment was -- the inventory level remains quite high. And therefore, the price performance or rather price -- was becomes critical for the profitability of that particular segment in second half. But we have enough new SKUs to address the demand and issues in the low-end segment. And we're expecting roughly RMB 18 million in procurement savings from launching new appliances for the whole year. And we remain largely on track with its implementations.

And I suppose this 1 percentage point gross margin expansion of GE Appliances in the first half is largely attributable to procurement synergies as we only started with consolidation of Candy business and now we actually thinking about (inaudible) million in terms of synergy improvement. But I think taking into account the RMB 1.5 million that went into restructures of the business and the total contribution, it's only about EUR 7 million from the Candy business.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [64]

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Thank you very much. Hey, Frankie, could you please help us see how many questions are there still on the line.

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Operator [65]

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At the moment, no questions.

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [66]

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Great. Thanks.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [67]

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Okay. Great. Okay. I could say, we already reached 1 hour. So Anita, or Mr. Gong or Ms. Ming, would you have any final concluding remarks for investors. So how would you want to wrap up?

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [68]

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Allow me to translate that. (foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [69]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [70]

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[Interpreted] Well, we don't actually have any further comments, Dylan. Thank you very much.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [71]

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Okay. Great. Thank you so much. Thank you all for joining our conference call, and especially thank you management for sharing with us today, very helpful. Appreciate your time. (foreign language)

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Wei Gong, Haier Smart Home Co., Ltd. - CFO & VP [72]

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(foreign language)

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Anita Sun, Haier Smart Home Co., Ltd. - Senior IR Manager [73]

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(foreign language) Thank you very much.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [74]

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(foreign language)

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Operator [75]

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Thank you for your participation. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]