Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for Fiscal Year 2021 and the First Quarter Ended September 30, 2020. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. 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.

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

Thank you, Arden. And greeting to, everyone. Industrial Automation, IA business finished the quarter with revenue and contract at $82.6 million and allow $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.

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.

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?

Your first question comes from from MS. Please ask your question.

The first question about this quarter we can see though the railways revenue decreased because maybe this year the CRC delayed. But meanwhile, we also see when APP contracts contract right now for many, like better 200 or 300. So what about the fact that the next quarter the revenue of related patient will be increased relatively. The second question. Okay; so the first question we have for right now I'll translate the second into…

By the way, it really depends on the procedure of the DRGT schedule. So we recognize revenue. And also about 80 CRC - to I mean 200 with one, about 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 to answer. And second question about the industrial automation. The industry automation compared differently very fast; so without the whole year expectation, performance in this automation, and this answer will have to - will speak by Colin.

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 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?

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 towards 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 towards 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. Thank you, Kevin . Next question?

Your next question comes from Joseph from JP Morgan. Please ask your question.

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 , 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?

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 . 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.

In addition, what Steven is saying; on exchange rate you see there is some frustration from the beginning the quarter versus towards 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. 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 , 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. And in this 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 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. 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.

Okay. Okay, thank you for your insights.

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.

Thank you.

That does conclude our conference for today. Thank you for participating You may now disconnect.