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Hollysys Automation Technologies Ltd (HOLI -0.18%)
Q1Â 2020 Earnings Call
Nov 14, 2019, 8:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Hollysys Automation Technologies Earnings Conference Call for the First Quarter of Fiscal Year 2020 ended September 30, 2019. [Operator Instructions] Please be advised that this conference is being recorded today, November 14th, 2019 Beijing Time.
I'd now like to hand the conference over to Mr. Arden Xia, the Investor Relations Director of Hollysys Automation Technologies. Thank you. Please go ahead, Mr. Xia.
Arden Xia -- Director-Investor Relations & Communications
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 IR Director of Hollysys. On today's call, Mr. Shao will provide a general overview of our business, including some highlights for the first quarter of fiscal year 2020, Mr. Steven Wang will discuss our performance from 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 expectation, 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 these statements. Business conditions in China and in Southeast Asia, continued compliance with government regulations, legislation or regulatory environments, requirements or changes adversely affecting the businesses in which Hollysys is engaged, cessation or changes in government incentive programs, potential trade barriers affecting international expansion, fluctuation in customer demand, management of rapid growth and transitions to new markets, intensity of competition from or introduction of new and superior products by other providers of automation and control systems technology, timing approval and the market acceptance of new product introductions, general economic conditions, geopolitical events or regulatory changes, as well as other relevant risks detailed in Hollysys filings with Securities and Exchange Commission.
The information set forth herein should be read in light of such risks. Hollysys does not assume any obligation to update information discussed in this conference call or in its filings. Please note that all amounts noted in this conference call will be in US dollars, unless otherwise noted.
And now, I'd like to turn the call to Mr. Baiqing Shao. Please go ahead Mr. Shao.
Baiqing Shao -- Chief Executive Officer
Thank you, Arden and there's a little for everyone. I would like to discuss some key events during this quarter. IA business finished the quarter with revenue and contract at $64.6 million and $84.0 million, achieving 12% and 4.6% year-to-year growth respectively. Under the guidance of our "3+1+N" strategy, we continued our effort in market penetration in different industries. In our power business, we signed a contract to provide control solution to urban heat supply network, which is the first project of this kind for Hollysys.
In chemical business, we have officially completed the milestone Zhong'an coal-chemical project and they will continue to provide maintenance and other services afterwards. The project is one of the largest MAV-DCS projects for Hollysys and we provided total solution covering the integration of up to ten systems including control system, asset management system, alarm system, gas detection system etc.
In the petrochemical industry, with our DCS and SIS being certified by CCS, China Classification Society earlier this year, we are better qualified in providing control solution in offshore oil related business. Our strategic relationship with CNOOC, China National Offshore Oil Corporation proceeded further as we signed several contracts with them in providing control solution to their offshore oil platform this quarter.
Besides market penetration through the newly built projects, we have kept leveraging on our nationwide network to respond to the aftersales demand of different industries, especially as the control products are approaching the end of life cycle. We maintained close relationship with our existing customers through various types of aftersales service, while also exploited the opportunity in obtaining new clients through replacement and upgrade project, especially in the chemical and petrochemical industries.
We are also building up our capability in providing more comprehensive solution covering full life cycle of the project. With the recently completion of the acquisition of a small pharmaceutical and chemical design institute, we are able to get involved in potential projects at earlier stage in the future for better opportunities.
In our smart factory solution, following our previous breakthrough contract in the power industry, we have signed several contracts this quarter with both existing and new customers from the chemical industry. Such will be long-term cooperation so as to turn their production smart comprehensively step-by-step. We have also broadened with our industrial software solution matrix, as we launched a new solution that help to optimize emission control and signed the first contract with a client from the power industry.
Rail business finished the quarter with revenue and contract at $44.6 million and $21.0 million, recording 11.5% and 70.6% year-to-year decrease respectively. In the high-speed railway business, the bidding pace of CRC has not met the expectation of the marketer. We continued to provide aftersales service on our high-speed railway signaling system -- signaling products covering software upgrade, spare parts sales, maintenance and replacement.
Meanwhile, we are also actively preparing ourselves for new products and service in the aftersales high-speed railway market. In the inter-city high-speed rail business, we signed contracts to provide ATP with automatic train operation function to the Pearl River Delta region. In subway business, the subway line for the new Beijing Daxing Airport commenced business operation in September, with Hollysys being the provider of SCADA solution that supports driverless operation.
Going forward, our rail business 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. 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.
M&E business finished the quarter with revenue and contract at $14.0 million and $33.6 million, recording 54.2% year-to-year decrease and 128% year-to-year increase respectively. Given the macro economy in Southeast Asia and the Middle East, risk control remain to be the key focus of our M&E business. In IA overseas business, progress is constantly made in terms of establishment of the new cooperation with a new key EPC players as well as ongoing cooperation with existing partners. Going forward, we will continue our effort in developing partnership with key EPC players and strengthening localization in manufacture, marketing and services in overseas business.
With that, I'd like to turn the call over to Steven Wang, who will read the financial result analysis.
Steven Wang -- Chief Financial Officer
Thank you, Mr. Shao. I'd like to share some highlights for the first quarter ended September 30, 2019. Comparing to the first quarter of the prior fiscal year, the total revenues for three months ended September 30, 2019 decreased from $138.7 million to $123.2 million, representing a decrease of 11.2%. Integrated contracts revenue decreased by 10.4% to $104.5 million. Products sales revenue decreased by 23.8% to $6.1 million and services revenue decreased by 9.9% to $12.6 million. The Company's total revenues can also be presented in segments as follows.
For the first quarter, Industrial Automation revenue achieved $64.6 million, Rail Transportation Automation revenue $44.6 million, Mechanical and Electrical Solution revenue $14 million, overall non-GAAP gross margin was 37.7% for the three months ended September 30, 2019 as compared to 37.2% for the same period of the prior year.
The non-GAAP gross margin for integrated contracts, product sales and services were 32.6%, 79.9% and 59.5% for the first quarter compared to 30.8%, 75% and 67.9% for the same period of the prior year respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margins. Selling expenses were $7.3 million for the first quarter, representing a decrease of $0.4 million or 5.6% compared to $7.7 million for the same quarter of the prior year.
Selling expenses were 5.9% and 5.6% for the three months ended September 30, 2019 and 2018, respectively.
Non-GAAP G&A expenses grew $10.6 million for the first quarter, representing a increase of $2 million or 23.6% compared to $8.6 million for the same quarter of the prior year. Non-GAAP G&A expenses were 8.6% and 6.2% for the quarters ended September 30, 2019 and 2018 respectively. R&D expenses were $8.9 million for the first quarter, representing a increase of $0.1 million or 2% compared to $8.8 million for the same quarter of the prior year. Presented and 8 percentage of total revenues, R&D expenses were 7.3% and 6.3% for the quarters ended September 30, 2019 and 2018 respectively. The VAT refunds and government subsidies were $3.5 million and $3.5 million for the quarters ended September 30, 2019 and 2018 respectively.
The income expenses and effective tax rate were $6.2 million and 17.3% for the first quarter as compared to $5.5 million and 16.3% for the comparable prior year period. The effective tax rate fluctuation was not only due to the different pre-tax income mix with different tax rates as company's subsidiaries are subject to different tax rates in various jurisdictions. The non-GAAP net income attributable to Hollysys was $29.8 million or $0.49 per diluted share. This represent a 6.1% increase over $28.1 million or $0.46 per share for the comparable prior year period.
On a GAAP basis, net income attributable to Hollysys was $29.7 million or $0.49 per diluted share, representing a increase of 6.4% over $27.9 million or $0.46 per diluted share, reported in comparable prior year period. Contract and backlog highlights. Hollysys achieved $138.6 million of new contracts for the first quarter ended September 30, 2019. The backlog of September 30 2019 was $578.9 million. The detailed breakdown in the new contracts and backlog by segment is as follows. The new contract achieved the first quarter ended September 30, 2019, Industrial Automation new contract $84 million, Rail Transportation $21 million, Mechanical and Electrical Solutions $33.6 million, backlog as of September 30, 2019 Industrial Automation backlog $195 million, Rail Transportation $288.9 million, Mechanical and Electrical solutions $94.6 million.
Cash flow highlights. For the first quarter ended September 30, 2019, the total net cash inflows was $15.3 million. The operating cash flow was $39 million, the invest in cash flow was $8.1 million and mainly consist of 31.9 million of matured time deposits and $4.5 million of proceeds received the disposal of an equity investment, which was partially offset by $27.8 million of time deposits placed with bank. The net cash used in financing activities was $20.3 million and mainly consisted of $20 million repayments of funds payables.
Balance sheet highlights. The total amount of cash and cash equivalents were $340 million, $332.5 million and $276.9 million as of September 30, 2019, June 30, 2019 and September 30, 2018 respectively. For the three months ended September 30, 2019, DSO was 204 days as compared to 170 days for the comparable prior year period and 150 days for the last quarter. The inventory turnover was 56 days as compared to 51 days for the comparable prior year period and 40 days for the last quarter.
Arden Xia -- Director-Investor Relations & Communications
Operator, please.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Kevin Luo from Morgan Stanley. Please ask your question.
Kevin Luo -- Morgan Stanley -- Analyst
[Foreign Speech]
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Kevin Luo -- Morgan Stanley -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
And the first question for -- about this quarter compared the Railway Transportation compare decreased. So, what about this quarter will deliver of the ATP contract and also at end of this year in December around it, could you give us some hint about the delivering top line winning from your side of ATP on the rolling stock timeline. And also the differences between the rolling stock delivering and your ATP signalling control system delivering differences, I mean, it's well after for one month after delivering of the rolling stock or what kind of timeline.
And the second question for Industrial Automation backlog and current position is compared high within history. And could you give us the proposition breaking down by different sub verticals like in the thermal, the coal power, the chemical and petrochemical etc. And also please give us the prediction for the future trend within IA of the backlog. Thank you.
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
Let me finish the translation. The first question about ATP and actually it really depends on the CRC China Railway Corporation speed to require us to deliver sometimes at end of this year would catch up, sometimes not. So this really depends on the situation. And currently this year, we -- the CRC open bidding for 146 SaaS of ATP and we get 40 [Phonetic] SaaS ATP 30% and also it will be delivering for the coming months. The Industrial Automation actually will not provide the breaking down proportion for the backlog, but generally speaking for the new contract to separate by different industry like the power we take around 40% to 45%, chemical, petrochemical take around 40% to 45%.
And in future trend we still think the Industrial Automation will keep growth. And also we discussed just about the ATP whether or not will finish the delivering for the 40 SaaS of this time, but it still depends. And then finally CFO mentioned about, if considering the first quarter of this year and the second quarter together, we think the first half year of fiscal year 2020, the Railway Transportation should be compared increase because based on current backlog and the potential delivery, we think the revenue could catch up a positive growth.
Thank you, Kevin. Operator, next one please.
Operator
Your next question comes from the line of Alex Chang from Citi. Please ask the question.
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
The question is for -- about Railway Transportation segment and also mentioned by Kevin, I want to continue to ask about the prediction for the performance of Rail Transportation for fiscal year 2020 because currently the CRC bidding process ended the market expectation. So what about the prediction for this fiscal year performance of Rail Transportation?
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
At end of this calendar year and the beginning of next calendar year it will -- would have the ATP bidding for the new SaaS of the high-speed rail signalling control system. And based on current backlog and the prediction, we're thinking the whole fiscal year performance for the Rail Transportation could keep I mean compare -- just making -- to compare the same or just a little bit increase, we will through the after-sale services -- after sale revenue to catch up the potential and expectation of the bidding process. So the Rail Transportation still -- the performance is good
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
I still want to ask about the new products, like the track circuit, like the subway CPCC system and for the future -- for this whole fiscal year, how much percentage within the backlog contribute come from these new products? And also when the subway CPCC system could start the first contract?
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
The capacity still -- we didn't test a procedure, so it will not contribute too much within the backlog for the fiscal year 2020. And CPCC system still on the rail side for -- there is more project, but not too large contract. So it is either not to contribute to the railway transportation revenue within 2020. But we will try our best to get the first large contract from the CPCC system.
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
The last one more question related to the P&L, the P&L shows two new items gain, one gain is disposal of investments, the equity investee around $5.8 million and another one for the equity investee also racked booking around $1.5 million, what about the themes behind of these two items?
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Steven Wang -- Chief Financial Officer
[Foreign Speech] There is a share net income equity investee. [Foreign Speech]
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Steven Wang -- Chief Financial Officer
[Foreign Speech]
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
Okay, let me finish translation. The first one for the $5.7 million about gain on disposal net -- equity investee that represent the IPE company. We sold our shares in one of our joint stock company called IPE and the difference -- different between the price sold and our share original book value is recognized as gain.
And also Alex asked -- further asked about what kind of background of this company and this company is focused on the Biotech related testing. And also Alex asked about why you sold this company because you announced, you also get pharmaceutical design institution, is this any conflict between each other? The answer is no, because the IPE is really focused on the bio testing, but what we -- we -- the new acquired -- the pharmaceutical design institution is for our bid comprehensive solution because this can take the full cycle of the pharmaceutical industry process control and it can support the business synergy for the future.
But the IPE joint stock company is not, so this is the first one. The second question related to the $1.5 million, that would be cost to equity investee and we get the dividend is a kind of investment gain. And also Alex asked about whether or not it's sustainable? It's not sustainable, it just depends on different quarter performance by the companies itself. So it can fluctuate all the time. Thank you.
Alex Chang -- Citi -- Analyst
[Foreign Speech]
Operator
Your next question comes from the line of Jacqueline Du from Goldman Sachs. Please ask the question.
Jacqueline Du -- Goldman Sachs -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
The question is about Industrial Automation and we could see see the company approved a lot of resources within the chemical, petrochemical industry. And I also -- we mentioned about Zhong'an coal a project. And this time, you mentioned about the new project for the CNOOC and it is it the same product? And also I want to know about what capability you are increasing within the chemical, petrochemical. And for the fiscal year 2020, is there any other new large project that will join?
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
And thank you all for your questions. Actually, we really put a lot of resources within the chemical, petrochemical. We're hired express and also even the very famous ones within the industry and to increase set up our brand name and let the customer know us. And the right now, the Zhong'an project is not the same as this time we said about CNOOC project. The Zhong'an project that is the largest one chemical project within China and we finished whole project right now and get the admission by the customers. And this can demonstrate the Hollysys capability. And then the CNOOC project is also very important because we finished it by CCS. If you are certified by CCS, you can participate offshore oil platform project. So this is a pretty new one for the Hollysys. And we will continue to sign the large project with the large state-owned enterprises within the chemical, petrochemical industry for this year and we think the next step we could contribute more to this industry.
Jacqueline Du -- Goldman Sachs -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
I want to make supplement to ask question about if -- from the competitive thinking, what about the current market share for the chemical petrochemical and what about the future -- the market share you want to achieve?
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
The chemical, petrochemical pair -- competitors actually for the former years, we were focused on the power and not to put more enough resources within petrochemical, so we're behind that. And right now we are catching up and we think we will very quickly to penetrate the market, but from the market share to say it's hard to give you the data, because there has been no statistical bureau and also is very fragmenting within the sub industry. So, I mean maybe in future, but right now we have no data in hand. Thank you.
Jacqueline Du -- Goldman Sachs -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
Because of the time constraint, the last one question. Thank you, operator.
Operator
Your final question today comes from the line of Lingxin Kong from from CICC. Please ask the question.
Lingxin Kong -- CICC -- Analyst
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
Okay. The first question I want to ask a detail about your set of the ATP when 40 SaaS. The 40 SaaS means how many price actually? And this answer the SaaS, each train rolling sub train have two SaaS of ATP, so it should be 20 rolling stocks.
Baiqing Shao -- Chief Executive Officer
Okay. [Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
[Foreign Speech]
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
[Foreign Speech] Okay. This question about the -- Mr. Kong said actually the CRC open bidding for the trains, more than 100 trains. So if calculated by your side, you have 20 is not one third of market share. And I want to make -- clarify that we see the one-third market share no problem, but maybe the -- whether or not 20 rolling stock or 40 rolling stock we have to double-check because the data right now will not -- as the same, but we -- based on the press release by the CRC. So no matter what kind of numbers we get one-third, this -- the market share have no doubt.
Lingxin Kong -- CICC -- Analyst
Okay, thanks. [Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
The second question about the railway transportation new contract, CFO Mr. Wang said the performance revenue for the Railway Transportation for the Q1 and the Q2 terms positive, but I want to ask that from the new contract stack, could you give us some prediction for the new contract of Railway Transportation for the first half fiscal year compared increase or decrease?
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
And in revenue, we give -- the prediction is based on the execution of the projects and backlog. So this is true to achieve, but based on the new contract, it's hard to say, it really depends on the CRC bidding process.
Lingxin Kong -- CICC -- Analyst
Okay. [Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
And for the gross margin, the last question for the gross margin, I saw the first quarter gross margin increased 0.5%. And also I noticed that the structure like three different types of contracts -- the integrated contract, the product sale [Indecipherable] and internally the integrated contract compare -- increased 2.6%. So, could you talk more about the integrated contract internal what kind of is changing?
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Steven Wang -- Chief Financial Officer
[Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
Mr. Shao said from the operation business effect, the company always focused on control, the gross margin and to improve the contracted show at first time and the delivery and quality to manage the range. And you could see our range prediction for the gross margin always within the range of what we said, like the whole business 35% to 40%. And the fluctuation specific like a 1% for example, it's hard to say internally is hard to contribute. So -- but what we can focus is the whole management efficiency improvement. So this part is what do we want to emphasize. And then we will continue to control the expense, everything to improve the gross margin and to lock up the net income.
And CFO mentioned about the gross margin, we will lock up, we've been a health range. And if you see the Railway Transportation itself, it's hard to use one quarter to show about the whole performance, represent the whole gross margin. Actually we recommend that you see the Railway Transportation should -- based on a whole year because the quarterly fluctuation would -- very sharply. Thank you.
Lingxin Kong -- CICC -- Analyst
Okay, thank you. [Foreign Speech]
Arden Xia -- Director-Investor Relations & Communications
Okay. 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 after the call. We're looking forward to speaking with you again in near future. Thank you.
Baiqing Shao -- Chief Executive Officer
[Foreign Speech]
Operator
[Operator Closing Remarks]
Duration: 58 minutes
Call participants:
Arden Xia -- Director-Investor Relations & Communications
Baiqing Shao -- Chief Executive Officer
Steven Wang -- Chief Financial Officer
Kevin Luo -- Morgan Stanley -- Analyst
Alex Chang -- Citi -- Analyst
Jacqueline Du -- Goldman Sachs -- Analyst
Lingxin Kong -- CICC -- Analyst
