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Hollysys Automation Technologies Ltd (NASDAQ:HOLI)
Q1 2021 Earnings Call
Nov 13, 2020, 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 Fiscal Year 2021 First Quarter Ended September 30, 2020. [Operator Instructions] Please be advised that this conference is being recorded today, November 13, 2020, 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 -- Investor Relations Director

Hello, everyone, and thank you for joining us. Today, our attendees are CEO, Mr. Colin Sung; CFO, Mr. Steven Wang; Co-COO, Mr. Yue Xu and Mr. Lei Fang, who are in charge of IA and Rail business, respectively, as well as Mr. Evan [Phonetic], Chairman of Hollysys Group, one of the company's subsidiary; and myself, IR Director of Hollysys.

On today's call, Mr. Sung will provide a general overview of our business, including some highlights for the first quarter of fiscal year 2021, Mr. Steven Wang will discuss our performance from financial perspective, and all management team will answer the 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 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 factors 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 business 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 transition to new markets; intensity of competition from or introduction of new and superior products by other providers of automation control system technology; timing, approval and market acceptance of new product introductions; general economic conditions; geopolitical events and regulatory changes as well as other relevant risks detailed in Hollysys' filing with Securities and Exchange Commission.

The information set forth herein should be raised in light of such risks. Hollysys does not assume any obligation to update the 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.

I'd now like to turn the call to Mr. Colin Sung. Please go ahead, Mr. Sung.

Colin Sung -- Chief Executive Officer

Thank you, Arden. And greeting to everyone. Industrial Automation, IA, business finished the quarter with revenue and contract at $82.6 million and allow [Phonetic] $7.8 million, representing 27.7% and 28.4% year on year growth respectively. In power sector, we continue our efforts in strengthening our market position in high end coal fire market 600 megawatts and plus power unit. Meanwhile, with respect to our current client basis in this sector, we are actively responding to various regular and value-added service demands covering old system replacement, system upgrade, part component sale and annual maintenance.

In chemical and petrochemical sector contract growth remain healthy. We continue our effort in key project winning, client cooperation, marketing events, and the development and demonstration of a solution capability to penetrate the market and build our reputation.

Sector highlights of the past quarter include, winning the bidding of DCS, emergency sit down devices ESP, Asset Management System AMS, fire and gas F&G, integrated solution for true offshore oil platforms. In the eighth oil platform solutions for the company has won since the beginning of the calendar year. Marking and with remarkable progress for our inspiration in oil and gas industry.

Signing a coordination control system, CCS contract, with a client on is 400,000 tons per year at alcohol [Phonetic] and 200,000 tons per year meant for [Phonetic] MMA projects marking a grateful the company's first contract in MMA. Signing DCS, SIS, GDS, MES, OTS, AMFS and Information Security Integrated Solution contract with a client on its 100,000 tones poly carbonate projects that DCS control problems for the project amount to approximately 20,000 making it the largest ever for the company in the similar craft. In food and beverage and pharmaceutical sector, we continue to see healthy growth in contract with our core control solution capability and the inclusion of engineering design capability. We are building our engineering design, procurement, construction, EPS capability so as to provide more comprehensive solution for our clients.

PRI [Phonetic] progress was made in such model as we designed our first workshop level ETS contract with a client for 788 [Phonetic] refinery project, which is expected to lay a foundation for our further pursuit of a larger scale of EPC project in the future.

In smart factory business, we continue to actively engage the potential clients for various marketing events to stay close for in depth grasp of market demand, and to develop and improve our solution for real value creation in economic benefits and operation safety. Highlights of the past quarter include, signing a contract with a new client from the thermal power center to provide a total solution with the control level and management level data integration that covers comprehensive function and modules, including control optimization, smart analytics, equipment management, decision making and operational management. We expect such project to become a key demonstration of the solution for the thermal power sector.

Signing a contract with a client on the coprocessor for his new 660 megawatt power plant, contract covers a similar total solution and control and management level and marked a significant breakthrough in our Smart factory solution for high end co-fire market. Signing a contract with existing clients from the petrochemical sector to provide management level solutions based on our industrial internet platform. After sale business of AI is keeping the healthy pace. We continue to engage our valuable client basis and the response with all with both regular and value adding initiative covering all system upgrade and replacement.

Part components sales, annual maintenance, control optimization, data integration and energy management. Under our big automation initiative, we continue to improve our capability for a wide range of solution covering entire lifecycle. By end of September, we have put into operation our in-house instrument production line with which we were able to be capable of manufacture a certain type of instrument containing our total control solution, such as expected to be valuable addition to our project delivery, market opportunity and operation.

Rail business finished the quarter with the revenue and contract at $28.7 million and $24.2 million recording 35.6% year on year decrease and 15% year on year growth respectively. In high speed rail HSR sector, we continue our delivery of an on-ground solution along with the railroad construction progress. Theoretic progress was achieved for the smart solution initiative for the sector and we have completed our top-level design of the smart maintenance solution. Meanwhile, bidding from the client was seeing its gradual recovery in the post pandemic period, both for on ground and onboard equipment. Highlights of the quarter include winning the bidding of 140 sets of the total package over 274 sets of ATP for C2, 250 kilometer China's standard high-speed train in August.

In subway sector, our cloud basis SCADA project for center subway line six was fully delivered, which was the second cloud-based SCADA project for the company, and represents our constant effort in innovation for continual value creation for our clients. In delivery, our enhancement in supply chain management and engineering standardization, has contributed to improve quality and the efficiency of project execution. In after sale business, we continue to strengthen in local service network to expand service solution and to develop a knowledge and service center services for better depreciation.

In HAR sector, we continue to respond to regular services, including event maintenance, system and software upgrade, Part components sales as well as total replacement. We continue to add as the service provider to Hong Kong center high speed rail with our service quality be highly recognized. In subway sector, we continue to explore potential from the current client basis and sign contracts covering system upgrade, maintenance and product sales. Under our big transportation initiative, the company has established the small hallway solution was actively involved in marketing events for new contract referral in new business.

Highlights for the quarter include signing a breakthrough contract of smart traffic velocity solution for accession of the highway connecting to find and unite provinces. The data driven solution targets Highway Administration as the intended client and through collection and processing of logical geographic and private pent up, by the Highway Administration are more effective decision making in highway management, in particular under extreme weather conditions.

Mechanical and electrical solution, M&E business finished the quarter with the revenue and contract of RMB18.2 million and RMB12.3 million recording a 29.9% increase and 63.4% year-on-year decrease. COVID-19 remain a challenge to M&E and overseas business. We will keep monitoring the impact of this sector and the risk control remain to the key focus.

With that, I would like to turn the call over to Steven Wang company's CFO who will provide a financial result analysis. Steven?

Steven Wang -- Chief Financial Officer

Thank you, Mr. Sung. I'd like to share some financial highlights for the quarter ended September 30, 2020. Comparing to the first quarter of the prior fiscal year, the total revenues for three months ended September 30, 2020 increased from $123.2 million to $129.5 million representing an increase of 5.1%. Integrated contract revenue increased by 1.2% to $105.7 million. Product sales revenue increased by 7.3% to $6.6 million and service revenue increased by 36% to $17.2 million. The company's total revenue by segments are as follows. For Q1 of the fiscal year 2021 Industrial Automation revenue at $81.9 million, rail transportation automation revenue $28.7 million, mechanical and electrical solution revenue $18.8 million, total revenue $129.5 million.

Overall non-GAAP gross margin was 33.7% for the Q1 of a fiscal year 2021 as compared to 37.7% for the same period of last year. The non-GAAP gross margin for integrated contract, product sales and services vendors were 25.3%, 73.7% and 70% in the first quarter as compared to 32.6%, 79.9% and 59.5% 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 $8.2 million for the first quarter, an increase of $0.9 million, or 12.4% compared to $7.3 million for the first quarter of last year. As a percentage of the total revenues selling expenses were 6.3% and 5.9% for the three months ended September 30, 2020, and 2019, respectively. Non-GAAP G&A expenses were $10.2 million for the first quarter, representing a decrease of $0.4 million, or 3.9%, compared to $10.6 million for the second quarter of last year. As a percentage of our total revenues, non-GAAP G&A expenses were 7.9% and 8.6% for the quarter ended September 30, 2020, and 2019 respectively.

R&D expenses were $10 million for the first quarter an increase of $1 million or 11.6%, compared to $8.9 million for the same quarter of prior year. As a percentage of the total revenue in R&D expenses were 7.7% and 7.3% for the quarter ended September 30, 2020, and 2019, respectively.

The VAT refunds and government subsidies were $5.8 million for first quarter as compared to $3.5 million for the same period in the last year representing a $2.3 million or 64.1% increase, which was primarily due to the increase of VAT refunds.

The income tax expenses and effective tax rates were $4.8 million and 18.9% for the first quarter, as compared to $6.2 million and the 17.3% for the comparable prior year periods. The effect tax rate fluctuation was mainly due to the different pre-tax income mixed with different tax rates, as the company's subsidiaries were subject to different tax rates in various jurisdictions. The non-GAAP net income attributable to Hollysys were $20.8 million, or $0.34 per diluted share for the first quarter of 2021. This represents a 32% decrease over $29.8 million or $0.49 per share in the comparable prior year period.

Contracts and backlog highlight. The backlog as September 30, 2020 was $596.1 million. The detailed breakdown of the new contract backlog is as follows: new contracts, industrial automation $107.8 million, rail transportation $24.2 million; mechanical and electrical solutions $2.3 million; backlog as of September 30, 2020, industrial automation backlog, $252.3 million; rail transportation $254.8 million; mechanical and electrical solutions, $89 million.

Cash flow highlights. For the first quarter of a fiscal year 2021 the total net cash inflow was $34.9 million. The net cash provided by operating activities $21.6 million, the investing cash flow was $2.6 million and now they consist of $114.6 of mature time deposit, which were partially offset by $108.8 million of time deposit placed with banks. The net cash is used in financing activities was $0.2 million.

Balance sheet highlights. The total amount of cash and cash equivalents were $321.6 million, $288.8 million and $340 million as of September 30, 2020, June 30, 2020, and September 30, 2019, respectively. For the first quarter of fiscal year 2021, DSO was 185 days as compared to 204 days for the comparable prior year period and 167 days for the last quarter. The inventory turnover was 58 days as compared to 56 days for the first quarter of last year and 66 days for the last quarter.

Arden?

Arden Xia -- Investor Relations Director

Thank you. At this time, we'd like to open up for the QA session. Please note that for Chinese-speaking participants, we can also do the QA in Mandarin, and we will provide translation. Operator, please?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Kevin Luo [Phonetic] from MS. Please ask your question.

Kevin Luo -- MS -- Analyst

[Foreign Speech] The first question about this quarter we can see though the railways revenue decreased because maybe this year the CRC procurement delayed. But meanwhile, we also see when APP contract right now for many, like better 200 or 300. So what about the fact that the next quarter the revenue of [Indecipherable] will be increased relatively. The second question -- so the first question we have for right now I'll translate the second.

Colin Sung -- Chief Executive Officer

[Foreign Speech] By the way, it really depends on the procedure of the DRGT [Indecipherable]. So we recognize revenue. And also about 80 CRC -- to I mean 200 with one, about [Indecipherable] and another 300 with 125 by trains, and about a set of ADPs. And we can see the PRC beating is recovering, and we will regulate to when that -- we'll onboard, and also agree with the track equipments treating for the coming moment. And also, Kevin asked about the delivery phase, delivery speed; so we discussed about the delivery speed, it really depends on the CRC schedule. It's hard to say, for example, at the end of this month or at the end of this year, we can deliver half or two thirds of the total. The speed is really hard to predict that because it really depends on the CRC. We did provider their schedule sometimes always and transparency. So this is the answer.

And second question about the industrial automation. The industry automation increased very fast; so without the whole fiscal year expectation, performance of the industry automation, and this answer will have to --.

Kevin Luo -- MS -- Analyst

[Foreign Speech] In terms of organization compare increase because two main factors; one is the COVID-19 influence, and the right now recovery of all the things within China; so we actively to achieve the customers and to gain the beating. And the second one is, because the first half year of highness [Phonetic] alleviated of the COVID-19, alleviate a lot of activity and right now it's a kind of relief -- central relief for this quarter and next quarter. So, basically to say the whole fiscal year we still have copied to the peak to dispose. And the third question is about the cash, and we see you have a lot of cash-on-hand; what about to considering to raise a dividend or the average investment potential M&A. Is there any activities related to these stuffs?

Steven Wang -- Chief Financial Officer

Okay. For that, I would take the first response to that. In the given current economic condition and then the ongoing pandemic situation, both for domestic and international; the company based on the risk -- potential risk for the future development, a company still taking a cautious or conservative -- and particularly, you know, as you all know, Hollysys is a more a private-owned industry, not a SOV or government entity. So, in that manner the whole financial sector still a unsettle or uncertainty; so for that we still maintain or relatively keep picking up cash position for the time being. But in the meantime, companies still looking for opportunity, but most in the domestic market for a potential target related to our both core competency in the rail and industry automation. So, we are continuing to working with our COOs to identify the target to expand, enhance, and also step our strategic partner development.

And then, in addition, obviously, you've seen we do increase our expenditure related to R&D expenses for the current quarter, compared to the previous quarter. Given that we will continue to look in there to identify the existing technology and the current technology undertaking, and to expand our knowledge bases that will enhance our revenue contribution, ultimately toward the bottom-line contribution to the company. And then third is basically, you mentioned about the dividend payment. Obviously, the company already made the dividend declaration a few weeks ago and we made the proper announcement. So, that payment will be paid out toward the end of November; but at the current stage, we still look at the dividend policy, if not a permanent dividend policy yet, but we will evaluate the policy as ongoing basis.

And then, overall, I think we mentioned I wanted to point out, as the company mentioned the guidance in the previous year-end financial disclosure, and then that guidance and then we'll maintain at the current stage we will not make any changes. So, we're still maintaining a top line revenue growth of 6% to 8%. So, with the cash and a certain expansion or potential opportunity, the organic growth of the overall company in related early question regarding industrial automation, we will maintain the current pace of 6% to 8% top line revenue growth.

Arden Xia -- Investor Relations Director

Thank you, Kevin. Next question?

Operator

Your next question comes from Joseph [Phonetic] from JPMorgan. Please ask your question.

Joseph -- JPMorgan -- Analyst

[Foreign Speech] Thank you. The first is the full account to gross margin; the gross margin we could see a flat line based on quarterly; and also, we see the fiscal year 2020, the past year, that I say is all innovation [Phonetic], the gross margin compared briefly. And this quarter, and also seems like the gross margin did good. So what about to share about information, different segments, i.e. rail, the gross margin respectively, the trend. This is the first question. Second question, about the Eastern lock and we belief potential is harder and they can explain some information about that. And the third question is about the new business, the added new trend or business or revenue to the achieve gain for the moment. To introduce what do you think about new business? No matter railing to the iron rail?

Steven Wang -- Chief Financial Officer

Yes, let's take the first question. Regarding to the gross margin. Again, again, like we mentioned before, you see a fluctuation over gross margin, but over the entire year, we normally maintain a stability of the gross margin, in terms of the -- for the IRA business and real business, you saw that there is a decrease of overall gross margin due to the higher percentage of industrial automation business as a percentage of the total revenue. So that's the reason for that. There's a -- we see, we see there is stability for the gross margin for IA and railroad business. We see a slight pressure on the IA business side; as on the IA business side because we had a strategic acquisition of the contract and the new customers nut again, for longer term, the margin will stable.

Now, we'll answer for that. Second question now [Indecipherable]. Again, those of -- if you see a fluctuation of the exchange rates to see gamma losses on paper on our on our financial statements. Now, will we have no -- we have requirement or financial instruments or tools for hedging the exchange rates. So, that's the consideration for now.

Colin Sung -- Chief Executive Officer

In addition, what Steven is saying; on exchange rate you see there is some frustration from the beginning the quarter versus toward the end of quarter; so we do take an exchange in a non-cash loss for the quarter. But you know, if the exchange rate maintained at the same level as last time, a little bit over 7, down to 6.8; so we will see some recovery in the second quarter assuming the exchange rate will maintain stable. As you know, the RMB was taking a little bit devaluation in the early this year and maintain went through a little bit upward over the last few months.

So, overall as Steven is saying, company -- giving the company cash predominantly in RMB currency; company at current stage do not have any hedging or any stabilization related to that but we believe RMB is more -- will be more or less maintaining the level going forward.

Joseph -- JPMorgan -- Analyst

[Foreign Speech]

Colin Sung -- Chief Executive Officer

From the related station, we also used the word from last quarter and we used to use the main act from China right now focused on being a canceled station; and this concept also relate to the hind-wind [Phonetic], for example, and we focus on -- what we do that is the intellectual management for the relation of station. So we also focus on this part, and we wonder -- we always grant the contractor of a particular highway -- management related contract. And we believe that this is also what contributes in that year and coming years of the revenue. And meanwhile, we also focused on -- no matter the mainland rail, a high-speed rail or the municipal relation; we also surfaced up the platform to get upgraded it to intellectual or smart direction of relation of special solutions. And also, we have provided a solution and the maintenance -- margin maintenance; in this part if we could see that the trend, and also, we'll contribute to the revenue for the related station.

Joseph -- JPMorgan -- Analyst

[Foreign Speech]

Colin Sung -- Chief Executive Officer

And industrial automation, I want to introduce grade effects. The first one; the first one is about the upgrading replacement cycle, and because the process can show, we have large basement of track records; and also right now, the market demand is increasing from this part. We need to disciple to do the replacements and upgrading, and we're also winning the contract from this part. The second one is intellectual smarts and manufacturing, and no matter the power or chemical -- petrochemical, we already have this significant project and these products when done [Phonetic] could provide the demonstration after effects can influence the customers to use the new solution for the smart manufacturing, to help them to improve the efficiency, those kinds of things.

The third one effect is from the downrange at pharmaceutical galleria and along with our EDC capability increase. This part of contract is increasing very fast, so we believe this part also contribute with the whole IA. And in conclusion, generally speaking, the industry automation is very stable market, and also from our revenue contribute designed to say, there -- they will have no very large population but we'll keep our pace to win the contract, and to let the customer use our equipments.

Joseph -- JPMorgan -- Analyst

[Foreign Speech]

Colin Sung -- Chief Executive Officer

Yes. If I may make additional information on the industrial automation margins; and -- you know, sometimes we get a lower margin contract but afterwards we have a continuation services and contracts with the same customer, we'll make up the margins; that's one of the reasons you'll see a fluctuation. So really, you know, I -- we've mentioned that a couple of times, we'll have to look long-term for the margins.

Joseph -- JPMorgan -- Analyst

Okay. Okay, thank you for your insights.

Arden Xia -- Investor Relations Director

Thank you, everyone, for joining us on the call today. If you haven't got a 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 near future. Thank you.

Colin Sung -- Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Arden Xia -- Investor Relations Director

Colin Sung -- Chief Executive Officer

Steven Wang -- Chief Financial Officer

Kevin Luo -- MS -- Analyst

Joseph -- JPMorgan -- Analyst

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