Ladies and gentlemen, thank you for standing by, and welcome to the HollySys Automation Technologies' Fiscal Year 2016 First Quarter Ended on September 30th, 2015 Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, November 12, 2015. I would like to hand the conference over to Mr. Arden Xia, the Investor Relations of HollySys Automation Technologies. Thank you. Please go ahead, Mr. Xia.

Hello everyone and thank you for joining us. Today our speakers will be Mr. Baiqing Shao, CEO of HollySys Automation Technologies; Ms. Herriet Qu, CFO of HollySys; and myself from Investor Relations of HollySys Automation. On today's call Mr. Shao will provide a general overview of our business, including some highlights for the quarter and fiscal year, and Ms. Qu will discuss our performance from a financial perspective and financial outlook for fiscal year -- for the first quarter of fiscal 2016. And the whole senior management will answer questions afterwards. Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are 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 set forth in the 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; fluctuations 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 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' filings with the 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 the information discussed in this conference call or in its latest filings. Please note that all amounts noted in this conference call will be in U.S. dollars unless otherwise noted. And now I'd like to turn -- represent Mr. Shao to discuss some key events during this quarter. In industrial automation business, during this quarter, we continuously insisted in executing our strategies to maintain the gross margin by penetrating the high-end industrial automation market and providing more highly customized solutions such as power, chemical, food and beverage, pharmaceutical and environmental protection related industries, while offering diversified value software packages to end-users for saving the cost and improving their efficiency. Additionally, we were focusing on reducing waste emission and environment protection area, building a strong after-sale department and set long-term goals on improving after-sale services while control the contracts qualities internally which all contribute to keep our profits running in relatively healthy growth cycle. Even though in the short term we are under pressure given the current weak external environment, we will still try our best to gradually recover and perform better in future. Going forward, we will continue to expand our sales force and allocate more resources to factory automation, penetrate further into high-end market while increasing market share in pharmaceutical industry, expand our products supply such as software and turnkey solution, leveraging our advanced technologies, experienced professionals, profound industry expertise, and customization and innovation capability. In railway transportation, we signed contract to provide ground-based high-speed rail signaling system and equipment to Chongqing-Wanzhou high-speed rail line. We also won the bidding to provide the ground-based high-speed rail signaling system and equipment to Xi'an-Chengdu high-speed rail line, Xi'an-Jiangyou section Sichuan area. We are quite confident of the steady rail revenue and backlog performance. As China is continuously investing large scale on building railway for the next five years, we will still benefit from the policy of 13th five-year-plan. Furthermore, we also worked to expand our rail products such as track circuit and interlocking system. We have finished one year testing of track circuit and got the official permit from authority to enter track circuit market which is another sizable market, with potential revenue contribution from track circuit in the coming years. For subway business, we recently won the bidding to provide supervisory control and data acquisition system, SCADA, to Kunming Subway Line 3, which shows our next step of penetration into second-tier cities. We are also following both domestic and overseas opportunities in both SCADA and subway signaling projects. We will continue to deliver quality works and work closely with subway authorities in the future to promote our SCADA system as the future subway signaling technology both in China and abroad. With China's tremendous rail and subway construction nationwide as well as One Belt One Road initiative, there is going to be an exciting prospect for Hollysys both domestically and abroad. As a well-organized rail signaling system provider, we are confident that with our strong R&D capability, leading technologies, solid execution and reliable products, Hollysys will continue to penetrate into China and the world's vast rail and subway market and achieve significant results. In the mechanical and electrical solution segment, revenue declined for this quarter due to the projects delayed in particular area and with impact on seasonal lumpiness. However, we are still tracing some large new orders and hope this business sector could perform better. In the long run, we achieved solid local market position, promoting direct sales with more offices and service centers expanding overseas and doing more EPC projects. We are also setting up joint venture companies to develop our business, as well as cooperate with large enterprises, plus abundant customer resources and strong execution in Southeast Asia, Middle East and expanding into India and other regions of the world. For the overseas industrial automation and rail transportation expansion, we are sending qualified and experienced engineers from China to overseas and recruiting local engineers to expand our overseas team. With our proprietary technologies and products, industry expertise and strong competitive advantages, we will continue to make exciting achievements in the international market in both industrial and rail transportation fields, and to create value for our shareholders. Now I'll also represent CFO Ms. Herriet Qu to read the financial results after this. I would like to share some highlights of first quarter of fiscal year 2016 ended September 30, 2015. Comparing to the first quarter of the prior fiscal year, the total revenues for the three months ended September 30 decreased from $140.7 million to $125.1 million, representing a decrease of 11.1%. In this quarter the M&E revenue decreased to $15.6 million due to the unbalanced nature of project progress. However, we do not expect the trend to continue based on the current M&E backlog level and the potential contracts. Broken down by the revenue types, integrated contracts revenue decreased by 13.6% to $111 million, products sales revenue increased by 28.9% to $11.4 million, and services revenue decreased by 19.9% to $2.6 million. The Company's total revenues can also be presented in the following segments Industrial Automation $49 million, Railway Transportation $54 million, M&E $15.6 million, miscellaneous $5.7 million. Total $125 million. Overall gross margin excluding non-cash amortization of acquired intangibles was 39.3% for the first quarter, as compared to 39.6% for the prior year. The non-GAAP gross margin for integrated contracts, product sales and services rendered were 37.3%, 52.6% and 65.5% for the first quarter, as compared to 36.3%, 79.2% and 61.6% for the same period of the prior year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin. The GAAP overall gross margin which including non-cash amortization of acquired intangibles was 39.1% for the first quarter, as compared to 38.2% for the prior year. The GAAP gross margin for the integrated contracts, product sales and service rendered were 37.1%, 52.6% and 65.5% for the first quarter, as compared to 34.8%, 79.2% and 61.6% for the prior year, respectively. Selling expenses were $6.6 million for the first quarter, representing a decrease of $0.2 million or 2.2% compared to $6.8 million for the same quarter of the prior year. Presented as a percentage of total revenues, selling expenses were 5.3% and 4.8% for the three months ended September 30, 2015 and 2014, respectively. General and administrative expenses, excluding non-cash share-based compensation expenses were $8.9 million for the first quarter, representing an decrease of 0.4 million or 4.3% as compared to $9.3 million for the same period of the prior year. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.1% and 6.6% for quarters ended September 30, 2015 and 2014, respectively. The GAAP G&A expenses which include the non-cash share-based compensation expenses were $9.8 million and $9.8 million for the three months ended September 30, 2015 and 2014, respectively. Research and development expenses were $7.7 million for the first quarter, a decrease of $1.1 million or 12.2% compared to $8.8 million for the same quarter of the prior year. Presented as a percentage of total revenues, R&D expenses were 6.2% and the same percentage for the quarter ended September 30, 2015 and 2014, respectively. The VAT refunds and government subsidies were $5.1 million for the first quarter, as compared to $6.4 million for the same period in the prior year, representing a $1.3 million or 19.8% decrease, which is primarily due to the decrease of the VAT refunds for $1.2 million. The income tax expenses and the effective tax rate were $4.7 million and 12.9% for the first quarter, as compared to $7.4 million and 21.2% for comparable prior-year period. When excluding the impact of non-GAAP adjustments on income before income taxes, the effective tax rate would have been 14.1% for the current quarter and 21.2% for the comparable prior-year period. The variance was due to different income tax rates were applied for the two comparable quarters. During the first quarter of FY 2015, Beijing Hollysys and Hangzhou Hollysys are in the process of applying their high tax certification which, once received, will permit the two companies to use a preferential income tax rate of 15% for calendar years ended December 31, 2014 to December 31, 2016. The high tax certification was later received in the second quarter of fiscal year 2015. Hence, for the first quarter of FY2015, the Company applied the statutory tax rate of 25% to calculate the current and deferred tax for Beijing Hollysys and Hangzhou Hollysys as opposed to 15% used in the first quarter of FY 2016. The non-GAAP net income attributable to Hollysys, which excludes non-cash share-based compensation expenses, amortization of acquired intangibles and acquisition-related consideration fair value adjustments, was $27.3 million or $0.45 per diluted share based on 60.6 million shares outstanding for the first quarter. This represents a 0.5% increase over the $27.2 million or $0.46 per share based on 59.1 million shares outstanding reported in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $30.3 million or $0.50 per diluted share, representing an increase of 11.7% over the $27.1 million or $0.46 per diluted share reported in the comparable prior-year period. Integrated contracts backlog highlights. Hollysys' backlog for integrated contracts as of September 30, 2015 was $490.4 million, representing a decrease of 13.8% compared to $568.5 million as of June 30, 2015, and a decrease of 1.1% compared to $495.7 million as of September 30, 2014. The detailed breakdown of the backlog for integrated contracts by segments is shown below. Industrial Automation $127 million, Railway Transportation $245 million, Mechanical and Electrical Solution $117 million. Total $490 million. For the three months ended September 30, 2015, the total net cash outflow was $17.4 million. The net cash provided by operating activities was $6.9 million. The net cash provided by investing activities was $1.6 million. The net cash used in financing activities was $15.6 million, the majority of which is used to repay short-term bank loans amounting to $16.5 million. Besides, the effect of foreign exchange rate changes was a cash outflow of $10.3 million, due to that U.S. dollar appreciated rapidly against the currencies of the countries we operate in, in the first quarter of fiscal year 2016. The total amount of cash and cash equivalents and time deposits with original maturities over three months were $234.9 million, $257.5 million, and $191.1 million as of September 30, June 30, 2015 and September 30, 2014, respectively. As of September 30, 2015, the Company held $190.5 million in cash and cash equivalents and $44.4 million in time deposits with original maturities over three months. For the three months ended September 30, 2015, days sales outstanding was 179 days, as compared to 176 days from the comparable prior-year period and 176 days from last quarter; and inventory turnover was 42 days, as compared to 41 days from the comparable prior-year period and 43 days from last quarter. Given the strong backlog currently on-hand and sales pipeline envisioned so far, we reiterate our guidance for fiscal year 2016 with revenue in the range of $565 million to $600 million and non-GAAP net income in the range of $110 million and $120 million. At this time we'd like to open it up for the Q&A session. Please note that, for Chinese-speaking participants, we can also do the Q&A in Mandarin and we'll provide translation. [Chinese language spoken] Operator, please.

We'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Kevin Luo from Morgan Stanley. Please go ahead.

Hi. Thanks for taking my question. I have two questions. The first question is about order backlog. As we can find Industrial Automation's order backlog further decreased by 5% quarter on quarter to $127 million, can we break down this backlog into DCS and the PLC? If there's no detailed breakdown, can you let us know through [ph] backlog from pharmaceuticals and nuclear? Or maybe percentage is okay. My second question is about M&E segment. As we can find M&E's revenue declined by 61% year over year to only $15.6 million, can you let us know the backlog by your three OSC [ph] subsidiaries, Bond, Concord and Hollysys International? Thank you very much.

[Chinese language spoken]

[Chinese language spoken]

Xie-xie, Shao-jong.

The first question is about the industrial automation and macroeconomic has still -- growth rate still quite slow, and also we meet some difficulty in this area. But the good thing is from new order, it's gradually getting better, and we charge [ph] that it's just a temporary -- I mean right now the backlog goes down, and actually we have confidence to achieve the target. The second, about M&E. Malaysia -- or [inaudible] that comes from Malaysia, and that area right now [inaudible] side is relatively not stable. So [inaudible] the other potential opportunities, but we will gradually to change the backlog to improve that and also to catch some on potential targets [ph] from that area, we will finally achieve the whole target of the guidance.

[Chinese language spoken]

And --

[Chinese language spoken]

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[Chinese language spoken]

Xie-xie.

And the CFO [inaudible] the pharmaceutical, we want to emphasize that backlog right now just represents the integrated contracts, not including the product sales and service. For example, like pharmaceutical area, the product sales not in the backlog. And also nuclear power. Nuclear power right now, the revenue comes from two main parts. One is from joint venture company and the second is from the product sales that we sell to, for example, CCNC or China Nuclear National Corporation. So that's the difference. And also they mentioned about the, in the past, the joint venture company from that side, the number is negative, but right now it's turned to positive. Okay. Operator, next one.

Your next question comes from the line of Baiding Rong from Credit Suisse. Please go ahead.

Hey, good morning. [Chinese language spoken]

The first question is on the ADP. Right now their official website announced that we win the contract, and what about that contract size and compare with [inaudible] compare to in the past, the market share of these three is increasing. So, what about the total amount, maybe increasing? And the second question is that, Malaysia [inaudible] the target is not changed. So - but represents the first quarter revenue as we see it already goes down. So, what about the next quarter, if it will concentrate in the next quarter about the revenue size? And the third question is about revenue and the backlog. And right now in IA, industrial automation, the revenue and backlog is going down, and maybe [inaudible] revenue recognition will accelerate and also the product sales not including the backlog, so, almost everything is going down, so, what about trend in future? Next one is our dividend. What about dividend policy in the future?

[Chinese language spoken]

The first question answer. The D3 [ph] is announced and the good news right now, this time, we -- in the past few years we just provide [inaudible] for C3 [ph], but right now this contract, including B [ph] and B5 [ph], and it is a significant contract. But we are under discussion right now so we cannot disclose the size of the contract. The second answer is that on Malaysia M&A, the project is delayed, and we will continue trying our best to accelerating the speed and also get new contracts to support the M&E part in future. [Inaudible]

[Chinese language spoken]

About the backlog and also revenue, it's gradually turned down, and we think in future it's going to keep at this status. And for more turnover [inaudible] some product maybe we'll recognize revenue quickly, that part, the percentage of the -- in the whole structure of the backlog right now, it seems not too detailed to disclose. And also it's not a big part [ph] problem to turning the whole [ph] backlog, and also we need a long time to make a relatively stable model in the future. So, generally speaking, [inaudible] very fast, like [inaudible] contracts, like that, it's really hard to give you data right now. And then the last one is about the dividend. The dividend policy, we will consider to pay a dividend, but right now we have no solid dividend policy.

[Chinese language spoken]

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[Chinese language spoken]

And the last question is about how to turn the right now status that have relationship about the new order and the revenue and backlog, seems a little gap in size. And we, in the future, we'll increase like aftersales revenue, also product sale, and also the other things to gradually change [ph] the situation. Okay, operator, next question.

Your next question comes from the line of Patrick Xu from Nomura. Please go ahead.

[Chinese language spoken]

[Chinese language spoken]

Okay. Xie-xie.

The first question is about PRC, how much percentage of the PRC in IA. The answer is right now we have no very accurate statistic, but it's relatively 10%. The second question is that -- CLS -- other income, is come from the other income. The other income seems have very large fluctuate, will that be trend in future? The answer is that other income, because there's fair value adjustment and also have exchange rate change sharply, so it's kind of affected the whole other income. And the third question is about the tax rate. It seems like also it fluctuates very sharply. And the answer is now that the tax rate, because last year we applied for the high tax certificate and also at the end of 2014 we got the certificate. And before that, we just applied the 25% of income tax. But for this year, it all takes around 15% income tax. And also beyond that, in addition, the withholding also affects the tax. So, generally speaking, each year, each fiscal year, our effective tax rate should be 17% to 19%. The last question is about the net income guidance and what about the non-GAAP and GAAP differentiation. And the answer is that, because of the fair value adjustment and also exchange rates, so it's very hard to give you the statistic difference between them, but I can tell you it's similar.

Okay. At this time we'd like to open it up -- 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 through follow-up contacts. We're looking forward to speaking with you again in the near future. Thank you.

Xie-xie.

Xie-xie

That does conclude our conference for today. Thank you for your participation. You may all disconnect.