Good afternoon, ladies and gentlemen. Today, Vtech Holdings Limited is announcing its results for the 6 months ended 30th of September 2024. The presentation is conducted in a live webcast at our head office in Hong Kong. Here to present the results are Mr. King Pang, Executive Director and Group President; Mr. Allan Wong, Chairman and Group CEO of Vtech Holdings; Mr. Andy Leung, Executive Director and CEO of Contract Manufacturing Services; and Ms. Shereen Tong, Group Chief Financial Officer.ÃÂ
First of all, Ms. Tong will present the group financial performance. Next, Mr. Leung will review the group segment results. Mr. Pang will then give the management outlook for the second half of this financial year. We will finish our presentation with a Q&A session. Now may I invite Ms. Tong to open today's presentation. Ms. Tong, please?
Thank you, Grace. Good afternoon, ladies and gentlemen, and all viewers online. First of all, I would like to share with you the financial highlights of the group for the 6 months ended 30th of September 2024 compared with the same period of the last year. As you see from the slide, the revenue of the group reduced by 4.5% to USD 1,089.7 million. The decrease in revenue was due to the lower sales in North America, Europe and Asia Pacific, which offset the higher sales in other regions. The gross profit of the group rose by 5.5% to USD 343.5 million, and our gross profit margin also improved from 28.5% to 31.5%. The increase in gross profit and gross profit margin was mainly due to the lower cost of materials arising from the decline in material prices and change in product mix, as well as the gross profit contributed by Gigaset after the acquisition of the assets on 5th of April 2024. These offset the higher direct labor cost, manufacturing overheads and freight charges as percentages of the group's revenue.ÃÂ
Our operating profit, however, reduced by 5.5% to USD 104.2 million, and our operating profit margin also reduced from 9.7% to 9.6%. The decrease in operating profit and operating profit margin was mainly due to the inclusion of the operation of Gigaset during the first half of the financial year and the increased spending on advertising and promotional activities and electronic learning products and telecom products compared with the same period of the last year. Our profit attributable to shareholders reduced by 6.6% to USD 87.4 million, and our net profit margin also reduced from 8.2% to 8%. As a result, our basic earnings per share reduced by 6.5% to USD 0.346, and our Board of Directors has declared an interim dividend of USD 0.17, same as last financial year.
Turning to the revenue by region. Our sales in North America reduced by 7.4% to USD 453.1 million. The decrease in revenue was due to the lower sales of our telecom products and contract manufacturing services, which offset the higher sales of our electronic learning products. Europe became the largest market of the group, accounting for 42.4% of the group's revenue. Our sales to European market reduced by 1.4% to USD 462.1 million. The decrease in revenue was due to the lower sales of our electronic learning products and contract manufacturing services, which offset the higher sales of our telecom products driven by Gigaset.ÃÂ
In Asia Pacific region, the revenue of the group reduced by 7.1% to USD 159.4 million. It was due to the lower sales of our telecom products and contract manufacturing services, which offset the higher sales of our electronic learning products. Other regions include Latin America, Middle East and Africa. The gross revenue in other regions rose by 33.6% to USD 15.1 million. The increase in sales in other regions was due to the higher sales of our electronic learning products and our telecom products. Our stock balance as of 30 September 2024 reduced from USD 432 million to USD 425.2 million compared with the same period of the last year. Our stock turnover days, however, increased from 120 days to 129 days after the inclusion of the inventory for Gigaset compared with the same period of the last year. Our trade debtors balance as at 30th of September 2024 increased from USD 451.7 million to USD 481.9 million. Our trade debtors turnover days also increased slightly from 60 days to 63 days.ÃÂ
Our financial position remains very strong. We were debt-free, and our net cash balance as of 30 of September 2024 increased from USD 108.5 million to USD 150.2 million compared with the same period of the last year. That's all of my presentation. I will now invite Mr. Andy Leung to share with you our operations review. Mr. Leung, please.
Thank you, Shereen. And once again, welcome all of you joining us today. We will talk about cost first. The group gross profit margin in the first 6 months of the financial year 2023 was 31.5% as compared with 28.5% in the same period last year. This was mainly due to the lower cost of material arising from the decline in material price and a change in product mix as well as the gross profit contributed by Gigaset following the asset acquisition we completed on 5th April this year. This offset higher direct labor costs, manufacturing overhead and freight charges. The increases in direct labor costs and manufacturing overhead as a percentage of group revenue were mainly due to an increase in production volume with an associated increase in factory workforce as well as the inclusion of work at the Gigaset factory in Germany. This offset the positive impact of the depreciation of RMB against the U.S. dollar, and an improvement in productivities. The increase in freight charges was mainly due to higher container rate compared with the same period of last year.ÃÂ
Before we move to the review of operations, I would like to spend a little time to talk about the asset integration of Gigaset. In April, we completed the acquisition of Gigaset, the asset of Gigaset communication. It was a global leader in communication technology based in BocholtÃÂ in Germany. Its operation in DECT cordlessÃÂ phones, business telephony solution for enterprise customers and Android-based smartphones are now managed and operated by the real VTech entity, Gigaset Technology. Right after the acquisition, we took quick efficient action to integrate the asset into our global operation in the past few months.ÃÂ
The supply chain was restored and changes to procurement were instituted to lower costs. By September, production and product supply have returned to normal. We have also been reestablishing the sales force in all major European countries. Communications and interaction have been enhanced to speed up decision-making and launch of new products. To unlock synergy in the development of new products and their manufacture, retail engineering teams are now working closely with the product development team in Germany to strengthen the product road map, reduce product costs and accelerate new product introduction. I will now turn to our operations in each of the 4 regions.
We begin with North America. Group revenue in North America decreased by 7.4% to USD 453.1 million in the first 6 months of the financial year 2023. Higher sales of ELPs were offset by lower sales of telecommunication products and CMS. North America became VTech's second largest market, accounting for 41.6% of the group revenue. ELP revenue in North America increased by 7.4% to USD 223.8 million. The growth was driven by higher sales in both the U.S. and Canada. In the U.S., after contracting in the calendar year 2023, the toys market began to stabilize. The new leadership team further capitalized on the upturn with a successful revitalized sales and marketing strategy.ÃÂ
Stand-alone products were the main growth driver with both the VTech and LeapFrog brands recording higher sales. As a result, VTech retained its leadership in electronic learning toys from infants, full toddler to preschool in the U.S. and Canada in the first 9 months of the calendar year 2024. In stand-alone products, VTech saw higher sales of infants, toddler and preschool products, the Kidi line and electronic learning aids. This offset declines for the Go! Go!ÃÂ Smart family of products, Switch & Go Dino, Marble Rush and Eco family toys. Sales of KidiZoom camera held steady. LeapFrog managed to achieve growth in infants, toddler and preschool products, as well as eco-friendly toys.ÃÂ
The Magic Adventure series also achieved higher sales as the successful rollout of Magic Adventure vernaculars contribute additional revenue. However, they were partially offset by lower sales of LeapLand Adventures. Platform products saw sales increase, mainly driven by LeapFrog products. LeapFrog saw higher sales of educational tablet, interactive reading system and Magic Adventure growth. However, subscription to the LeapFrog Academy reported a decline. For VTech, sales of platform products held steady during the period. Sales of touch and learn activity desk saw an increase, offsetting decline in KidiZoom smart watches and KidiBUZZ. Telecommunication product revenue in North America fell by 11.3% to USD 92.2 million with declines in both the U.S. and Canada. This included a small sales contribution from Gigaset in the region.
In residential phone, despite outperforming the market in North America and gaining further market share, sales were lower as the market continues to decline. During the first 6 months of the financial year 2025, VTech maintained its leadership position in the U.S. residential phones market. Commercial phones sales decreased despite growth in hotel phone and headsets. These were good sales of latest series of hotel phones. The Leo thermostat for the hotel channel make further progress in increasing market penetration. Sales of headsets growth as the customer increased order. They were, however, insufficient to offset lower sales of seat phone as a customer reduced order. Sales of multi-line analog phones also posted a decline. Sales of other telecommunication products also declined. Baby monitor saw sales decrease owing to keen competition. A reduction in order led to lower sales of K-line residential phones. The sales of IAD remained stable. In the first half of financial year 2023, the group maintained its #1 position in the baby monitor market in the U.S. and Canada.
CMS revenue in North America decreased by 22.6% to USD 137.1 million during the period. In the first half of the last financial year, improved material supply clear order backlogs, which boosted growth in professional audio equipment. By contrast, in the first 6 months of this financial year, end market demand was subdued and many customer consequence faced over inventory. This resulted in fewer orders in many key product category. In professional audio equipment, sales of power amplifier and audio mix were down as end-user demand dropped. Professional large speaker were affected by customer facing excess inventory. Sales of industrial products decreased driven by lower orders for corn and recognition machine. Solid-state lighting posted lower sales as projects were cut back due to the uncertain economic condition. IoT products saw sales decline as the customer experienced a financial issue. Globally, VTech has maintained its position as the world #1 contract manufacturer of professional audio equipment.ÃÂ
I turn now to Europe. Group revenue in Europe decreased by 1.4% to USD 462.1 million in the first 6 months of the financial year 2023 as higher sales of telecommunication products were offset by lower sales of ELP and CMS. Europe became VTech's largest market, accounting for 42.4% of the group revenue. ELP revenue in Europe decreased by 6.3% to USD 137 million with decline for both stand-alone and platform products. The toys market in the major European countries continues to experience decline because of weak economic growth. Higher interest rate and accumulated impact of inflation have reduced disposable income, in turn, causing retailers to exercise caution when placing orders.ÃÂ
Furthermore, the strong U.S. dollar continues to pressure retailers. Sales decrease in France, Germany and the Benelux countries, offsetting growth in the U.K. and Spain. In the first 9 months of the calendar year 2024, VTech remained the #1 infant toddler manufacturer in France, the U.K., Germany, Spain and the Benelux countries. For stand-alone products, growth in the LeapFrog brand was offset by the sales decline of Vtech products. At LeapFrog, Infant and Toddler products saw higher sales, offsetting decreases in pre-school products and LeapLand Adventures. The successful launch of Magic AdventureÃÂ binocularsÃÂ in key European markets added incremental revenue in the Magic Adventure series. Sales of eco-friendly toys remained stable. At VTech, Infant, Toddler and Pre-school products recorded higher sales. These gains, however, were insufficient to offset lower sales of the Go! Go! Smart family of products, Kidizoom Camera, the Kidi line, Electronic Learning Aids, Switch and Go Dino, Marble Rush and Eco-Family Toys.ÃÂ
Platform products saw lower sales of both VTech and LeapFrog products. At VTech, sales of children's educational tablet, Kidizoom smart watches, the KidiCom range of products and touch and learn activity desk all declined. At LeapFrog, both Magic Adventure Grove and Interactive Wing system recorded sales decreases. Revenue from telecommunication products in Europe increased by 93.4% to USD 84.5 million. Sales of residential phones and commercial phones rose as Gigaset sales were consolidated into VTech. Despite market decline and lower shipment to ODM customer, sales of residential phones in Europe rose as a result of the consolidation of Gigaset revenue. Sales of commercial phones also increased and Gigaset sales offset decline inÃÂ long-banded phoneÃÂ and hotel phones. Weak economic conditions in Europe and a consequence reduction in corporate spending affecting demand for phone. Hotel phone were affected by financial constraint as a distributor.
Sales of other telecommunication products decreased, largely attributable to lower sales of CAT-iq headset and the CareLife residential phone as ODM customers reduced order because of over inventory. This offset higher sales of baby monitors as the group continues to make progress in major European countries. In the U.K., the group maintained its position as the #1 baby monitor brand. CMS revenue in Europe decreased by 13.7% to USD 240.6 million, again, because of weak end market demand and excess inventory among customers. Sales of professional audio equipment, hearable and smart energy storage systems were all lower. The decline in this category offset rising sales of medical and health products, IoT and automotive products. In professional audio equipment, home audio interface product saw lower sales owing to delayed product launch and over inventory as a customer. Hearable posted a decline as one customer product reached the end of its life cycle and another faced excess inventory.
Smart energy storage system also report lower sales. The customer faced keen competition and was negatively impact by the cancellation of installation subsidies by the Swedish government. Medical and health product growth as hearing aids and hair removal product report higher sales. In IoT products, order for Internet connected thermostat and air conditioning control increased as the customer successfully grew sales by selling directly to business. Growth in automotive products was driven by increased sales of car battery chargers as Vtech gained market share. Sales of home appliance and communication products held steady. In Asia Pacific, group revenue decreased by 7.1% to USD 159.4 million, representing 14.6% of group revenue. Growth in ELP was insufficient to compensate for the declines in telecommunication product and CMS. Revenue from ELP in Asia Pacific increased by 1.1% to USD 35.4 million, mainly due to higher sales in Australia and Mainland China. In Australia, growth mainly came from the VTech brand. Sales recovered at the local toy market stabilized despite continuous tough economic conditions owing to higher interest rate. Launches of new product were well supported by effective marketing activity, resulting in a good sell-through at major retailers. Sales of LeapFrog product in the country were largely stable.
During the first 9 months of the calendar year 2024, Vtech maintained its position as the #1 manufacturer of electronic learning toys from infants through toddler and pre-school in the country. In Mainland China, both online and offline channel posted sales increase. Vtech increased in-store marketing and merchandising, resulting in higher sales of the core learning products, Go! Go! Smart Family of products and Marble Rush. Telecommunication product revenue in Asia Pacific decreased by 16.4% to USD 9.7 million. This was attributable to lower sales of residential phone and other telecommunication products in Australia and Japan. This offset growth in commercial phones as the group increased its sales of SIP phones. CMS revenue in Asia Pacific fell by 8.5% to USD 114.3 million. This was due to lower sales of professional audio equipment, medical and health product, and communication products. Professional audio equipment posted lower sales as order for DJ equipment declined. Medical and health products also saw sales decrease. Order for diagnostic ultrasound system fell at the customer lost market share in Mainland China. In communication product, order for marine radio fell as the depreciation of the Japanese yen saw a customer move production back in-house to Japan.
Finally, group revenue in other region comprising Latin America, the Middle East and Africa rose by 33.6% to USD 15.1 million. Other region accounted for 1.4% of group revenue. Both ELP and telecommunication product reported growth. ELP revenue in other region increased by 15.2% to USD 7.6 million as higher sales in Latin America and the Middle East offset lower sales in Africa. Telecommunication product revenue in other region grew by 59.6% to USD 7.5 million. The increase was attributable to sales grow in Latin America and the Middle East, offsetting a decline in Africa. This also included a sales contribution from Gigaset. CMA revenue in other region was immaterial in the first 6 months of the financial year 2023. That concludes the review of our operations. I will now hand over to King for the outlook.
Thank you, Andy. Good afternoon, ladies and gentlemen. Looking forward, at the macro level, despite the reprieve in inflation, household disposable income for most markets remains tenuous, while geopolitical risks are still elevated. This is weighing on confidence in our markets. Businesses and consumers alike remain cautious on their spending. Despite this challenging environment, group revenue for the full financial year is forecast to increase. Growth drivers are expected to be ELPs in the U.S. as well as telecommunication products now augmented with Gigaset. Profitability is on track to improve for the full financial year, aided by favorable cost of materials as well as higher sales contributions from our branded businesses.ÃÂ
ELP revenue is forecast to increase for the full financial year. This growth is expected to be driven mainly from the U.S., where the new leadership team is achieving good results. Stand-alone products will continue to drive sales increase, especially in the pre-school licensed category. In Europe, sales in our major markets are projected to pick up in the second half, driven by new products and their strong marketing campaigns. For Asia Pacific, growth in Australia and Mainland China is expected to continue. Telecommunication products revenue is forecast to increase year-on-year. Higher sales are expected for residential phones and commercial phones. The integration of Gigaset is on track to complete by the end of this calendar year. With normal production and supply of Gigaset products restored, sales are expected to improve in the second half. Our focus is now on growing Gigaset's commercial phones and residential phones. During the second half of this financial year, Gigaset's first desktop phones will be launched to complement this multi-cell system-based products. This will complete Gigaset's comprehensive product lineup for professional users and offices as well as in service and industrial environments.
We also aim to increase our share of the residential phones market in Europe by broadening Gigaset's product offerings across price points. For other telecommunication products, sales of baby monitors are forecast to decrease for the full financial year 2025. Facing geopolitical uncertainties and the anemic global economy, CMS revenue is expected to decrease for the full financial year. This notwithstanding, sales in the second half are forecast to stabilize. As we expand our global manufacturing footprint, Vtech CMS is well positioned to capture the growing demand for alternatives to Mainland China supply sources. In Malaysia, the group is building a new warehouse to enable redeployment of some existing space for manufacturing. Upon completion, targeted first quarter calendar year 2025, CMS production capacity in Malaysia will increase by 30%. Across the ocean, our facilities in Mexico are now fully operational and ready to fulfill U.S. customers on shoring requirements. Thank you. This concludes our presentation. We are now happy to answer your questions.
[Operator Instructions] The first question comes from Eric Lau of Citi.
May I have a couple of questions. Firstly, is about what sales amount booked from Gigaset for the first half? And then I'm surprised the telephony business in North America also dropped even including Gigaset. So, I say for the telephony business, can you give us the breakdown between residential and commercial excluding Gigaset, and we have an idea about what sales change for residential phone and commercial phone? That's the first question.
Okay. Maybe I can answer this question. We normally don't disclose individual sales for certain business sectors. But I can tell you that following our completion of acquisition of the assets in April, the first 6 months, of course, we have to rebuild the sales. So, the sales is relatively small as compared to the normal months. But I'm happy to report that by September, the sales for Gigaset is almost back to normal. And then October is even stronger. And at the same time, we are already achieving P&L parity in September. So, we are expecting P&L to be positive in the following months. As to your second question, why the USA is still dropping with consolidation of Gigaset? The structure of the Gigaset sales are predominantly in Europe, and VTech is strong in U.S. And this is why the synergy between Gigaset and VTech is so complementary. So, because Gigaset in the USA sales is minimal. So VTech telephone sales, residential phone sales will follow the normal structural decline of the market.
Okay. Sorry, may I have a follow-up? Actually, what was the sales split between residential and commercial for the first half? And then can you give us the idea if excluding Gigaset, what changed for residential and commercial?
Yes. I can only tell you that residential now accounts for less than half of our telephone sales. And the rest are between the new businesses, business system, business phones together with baby monitors. And the other products are more than half of telephone sales as a group. But we don't disclose individual regional sales.
Okay. I'll try one more. So, in terms of the sales decline, suppose residential still dropped more than commercial, right, for the first half?
Yes. The residential in U.S. are following the decline of the market, which is a double-digit decline on a yearly basis. We are already dropping less than the market. That means we are gaining market share, in particular in the U.S. And we believe that with the consolidation of the Gigaset European residential phone sales, we will achieve a growth in sales for residential phone overall worldwide.
I see. But commercial phone also dropped, right, for the first half?
Correct.
Okay. So, my last question here is what do you think about the long-term growth for the commercial phone because we are using Zoom, right? And then you see a hybrid environment. So probably fixed line telephony may not be quite appropriate to work with this environment, right, for the workplace change. So how do you see the challenge in terms of the long-term? Or should we expect the commercial phone continue to decline going forward in the coming 3 to 5 years?
With the consolidation of Gigasets, our commercial phone, in particular, the multi-cell deck will be stronger. Gigaset is a leader in the multi-cell commercial deck area, which is a growing area. The desktop phones because of our small market share, together with Gigaset in Europe will grow as we gain market share. Now the U.S., again, because of our small market share, we will gain market share and will grow, although the desktop SIP phone market is not growing. But together with the other products like the multi-cell back phone, we will grow the commercial phone sector.
Our next question comes from Sophia of Pi Bridge.
My first question is regarding the Gigaset. So, you say that in the first half of this year, we have seen some production adjustment. So, if we counted 2025 as a whole, do you still that Gigaset will see year-over-year decline or is able to like be flat or slight growth? This is my first question.
Our sales on a monthly basis getting close to what Gigaset sales before our acquisition. As I said earlier, the first 6 months is an adjustment period as we acquire the assets, we have to restart all the manufacturing from nothing. So, the sales -- monthly sales are close to the pre-acquisition sales already, although the full year will still be lower because the first 6 months is an adjustment, is a start-up period.
A follow-up question is regarding the margins, because Gigaset obviously, is seeing some cost optimization. And do we expect that the full year net profit to be like breakeven? Because I know that the first half is a little bit tough.
Yes. The gross margin for Gigaset products are actually higher than the VTech products. And then with higher sales, as we grow our monthly sales to almost the level of the pre-acquisition sales, we are expecting our full year to be -- our profit margin will be positive.
And another question is regarding some segments that you are presenting. There seems that a lot of, I would say, high inventory problem with the customers. Can we just give some future trend into the current destocking process? Are we seeing any like significant improvement into the second half or we have to wait for a little bit longer time?
The high inventory is mainly with the CMS customers. Maybe I will ask Andy Leung to address this question.
Yes, the higher inventory situation at the customer side was mainly due to the weak end market demand. And this is also due to the customer, they are over placing order in the previous financial year after the global supply of material had been improved. And starting from the second half, we start seeing the order is coming back. So, it is our expectation that the order will be resuming gradually.
Sophia, we will move to another person and then you follow the queue. Our next question comes from William from Chartwell Capital.
I have one question following up with the Gigaset and the VTech core brands. I see that the VTech engineering team is collaborating with the German team. I'd like to know, do we actually have an expectation when we started to see some results from the collaboration between the German team and the VTech core team?
We are already seeing positive outcome coming from the engineering team between Gigaset and VTech that we have a lot of collaboration for the first 6 months with Gigaset people coming to China, the automation people coming to China, and also our engineers collaborating with the Gigaset team. The Gigaset have a very strong hardware and software team, particularly the team in Poland, which is very strong in software, which complement VTech's team in terms of -- both in terms of residential phones and also commercial phones. To answer your question, yes, positive results is already coming out.
Okay. A very quick follow-up is we talked about the multi-cell deck commercial phone that we still have a relatively low market share in the U.S. Is there like a time line in terms of the new multi-cell back phone for commercial to be launched by VTech and Gigaset together in the U.S?
It's already starting to launch, and we will see results on the second half of the year.
Any further questions? Our next question also comes from Eric from Citi.
Sorry, probably we cannot mention about what Gigaset contribution in the first half. But can I just make the difference between the Europe telephone sales actually, almost double, right? In the first half. So, the difference is around EUR 40 million. Can I assume majority of the difference from Gigaset for the first half?
It's a good guess, but I cannot confirm.
Okay. And the second is actually, we still make a loss, right, for the first half from Gigaset. If excluding Gigaset, can we assume the operating profit actually flat or up?
I cannot comment on this, yes, because you are right. I think Gigaset first half because of the gearing up the sales from 0 to now almost to the normal level, it takes time. And of course, I mean, the operating profit is negative for the first half because of the starting up and the overheads are there. But I can't comment on anything more than that at this point.
Our next question comes from Sophia from Pi Bridge.
So one question is that I noticed there is an IoT customer facing some financial issues. I'm wondering this is like a single case. We see like customers are generally under very high financial pressure at this time and maybe there will be some, I don't know, like receivables maybe going -- not get back by the company. Could that be a concern?
The IoT customer that you talk about is coming from America. It is a customer selling the home automation. Yes, in the second half of the financial year -- of the last financial year, the customer fell into financial difficulty and that ended up with overdue payment. But fortunately, all our shipments have been cut further by credit insurance. So, that shouldn't be any problem. And just like what you said, yes, this is just an isolated case. We don't have any other customer reporting similar situation. And in fact, for that particular customer, the business has been acquired by a new investor and we are expecting the business will be resumed very soon.
Can I add one more question? So, I see that there is a Japanese customer who is moving to the in-house production versus the BMS. So, this is a simple case as well. Anything that we should bear in mind that this could be a major trend going forward?
This is another issue that are out of our control. The decision of customer -- they make the decision to move part of the production, back to Japan, their own factory is mainly due to the unfavorable exchange rate of Japanese yen. And as you can see at the time when we prepared the quotation to them, the exchange rate is somewhere around 1 to 140 something, but now the exchange rate is around 100. So, it's purely a decision of their management. And fortunately, all of those customers from Japan, this is the only single case make that decision, especially when most of their products are selling into Japan.
Yes. Sophia, I'm afraid that due to the time constraint, we cannot accept more questions. So, this is all we have the time for. Thank you very much for joining us. Thank you.
