Q2 2019 Earnings Call

Please stay on the line for the next available operator.

Is that all from their their movement within the supply chain I guess, you've already had customer conversations that have been able to instill the competence in that in that Steve Q4 sequential ramp.

So the timing of the ramp Q3 to Q4 is driven by the conversations that we've had with our retailers and distributors regarding their expected timing of orders and the shipments that would fall. So that's our best view as we sit here today.

Yes.

As to how the two quarters will play out I think that if it helps without this extraordinary shift.

For our top customers like Amazon.

Q3, Q4 with look coins.

Similar to prior years.

And so that we're not seeing an extraordinary ramp in.

The retail behavior or customer purchase behavior.

First this is a.

A disruption driven by tariffs.

Causing our retailers to be more backend focused in when they want product to arrive. So we're not expecting anything unusual.

Beyond the guidance as far as customer demand goes this is how our retailers are choosing to to purchase in anticipation of the holidays and just as a reminder, and last year. We faced the exact opposite phenomenon in Q3 and Q4. So our Q3 growth rate last year was much higher than it normally lines, because Amazon had decided to take a direct shipment from one of our contract manufacturers and do it in Q3.

And we we talked about that last year when it happened.

Okay. Thank you for that that's helpful.

And then the follow up question I had.

Can you guys.

I guess the Skus for the gross margin gross margin erosion that we've seen.

I understand the impact you guys appealing Harris, but I also see.

The promotional pricing environment, you guys are in right now.

And just wanted to get a better understanding of.

Well, where we are in that in that environment. You guys feel like you can regain a recapture some of that loss margin down the road or or is this.

Promotional environment here to stay at this point, thank you very much.

Well for 2019 at certainly here based on the guidance I provided we expect fairly flat gross margins Q3 to Q2, and then a slight further decline in Q4, which is our typical heavy promotional period.

So that environment, we certainly expect will be here in 2019, the second half of the year also has that's putting more promotional programs in place in Europe , specifically as that competitive environment, there stays quite strong.

I would say that the other thing that is impacting gross margins.

Is that a lot of our revenue is coming from recently launched products.

And we have a history of when we launch a product initially the gross margins typically lag the more mature products, the replacing and then improve over time so that.

We have a little bit of a stack up of a lot of new products.

Desire to go and act a little more aggressively in Europe .

Andy tariffs combining two.

Impact gross margins I think that the.

Terrorists and product maturity both improve overtime.

The competitive position.

Also is something that.

Is a little bit of a.

You know competition is not going to go away.

So I think that we will have some more aggressive situations at lower price points.

In our product portfolio.

But with the launch of our new products, we do expect that we will be creating more distance between us and the competitors as these products from rollout on a global basis.

But that is not translating into.

You know them suddenly deciding that they're going to move and give back a significant numbers of of of margin points, because they're facing the resultant of a slowdown in in in volumes as a result of higher prices. So it's it's sort of a has not been a well that has been material for us.

Got it and then from my follow up.

You, obviously and I'm just very low gross margin in Q4, you have talked about Malaysia coming out mine.

Backup for next year, you also have products are going to be a little bit more mature I guess I'm curious, how we should think about the margin trajectory from here.

You know when you do call them or to Malaysia can we get back to some of the gross margins, maybe four hours or incremental costs to Malaysia, we need to be thinking about that we didn't have in China. Just kind of you know Marge introductory from here or how we should think about that thanks.

So I'm not going to make any comments about margins beyond 2019, I'm going to argue stand for this year, but I will remind you that we can communicate earlier that at least initially products coming off the line in Malaysia, a like for like basis will actually be more expensive than the same product produced in China at least initially the labor rates that line labor rates are a little bit less expensive, but the management labor rates are a little bit more and more importantly, a lot of our most of our components supply is in China, and we will have additional costs to get those components to Malaysia for production. So at least starting off it's going to be more expensive.

Got it or.

More expensive meeting still better than 25% or just to be clear.

But you know rough order of magnitude on par with the 10 per cent terrorist is sort of neutral fish.

Depending on volumes and so forth.

<unk> to to try to ban on that a little bit.

Okay perfect. That's helpful. Thank you.

Yep.

Thank you and then next splashing <unk> the file road research online open.

Yes, good good morning wanted to Echo my thanks to release as well and wish Andrew book.

In his new role.

A question for college, you know looking at the second half of the year.

With the newer products I seven by seven plus just hitting the international markets and not having the constraint of the terrorists.

Could we see.

A higher product mix in favor of the newer products because you won't have to price them as high as you do in the U.S.

You know our our models for for.

International sales or or law or unchanged relative to the beginning of the year I think that we're excited to be launching these new products were counting on.

Them to deliver on the growth targets that that we have communicated.

You know and and so that I think.

Outside of North America things are good things are stable, they're behaving like we had a wanted them to if you're asking about.

A risk of gray marketing from Europe back to North America, or something like that <unk> I don't think we believe that that is going to be material.

Okay, Thanks and question for.

Alison.

Could you.

Maybe sites some areas that the company is scaling back in from a cost standpoint in order to.

At least from an operational standpoint mitigate the impact of.

Oh the tariffs.

Sure, it's really across the board, we're focused mostly on <unk>.

Discretionary types spending that we don't think will sacrifice you know our longer term strategic plan that it's really across all of the different functional groups that were looking for those productions.

Okay. Thank you very much.

<unk> Yeah, and then next question comes from I say, a merchant of Citigroup airline into open.

Yeah, Hi.

I just had a couple of quick question.

<unk> Yeah one.

The on the revenue Kate and they keep talking about I I just wanted to understand that I know a lot of questions have already been asked but.

I wouldn't reveal they even price increases are happening not just for I robot, but across other products consumer products as well they would have called in some of that demand into the third quarter ahead of you know anticipated price increases that are likely to impact. The second half that would have just given the strength that you saw in prime D. I would've thought Amazon would have tried to replenish them up that inventory.

Into the third quarter and before before sort of price increase and really take foot. So that was my first question and then just on gross margins in the trajectory of gross margin.

The guide for the care that are impacting it seems like that's the only partially for this year safely kind of then extrapolate that to the remainder of and you know going forward is it fair to museum and the full impact and that would be felt most likely in 2020 offset by some price increases of course, but is it fair to assume that from here on the margin.

You know <unk> <unk> unlikely to go up like more likely to see some downside pressure as we get into 2020. Thank you.

So.

Sure.

Relative to the buying cadence.

And thus the revenue Kato silver are retailers the prices have already gone Oh.

So that there is no anticipation of additional price increases and inventory there they would be taking in.

Would carry with it.

The 25% tariff them. So that's what you're seeing is.

Retailers.

Holding out some hope where at least acknowledging that in the current environment.

The only certainty is what exists today.

So that.

What we're seeing for example, with Amazon is word tariffs to go.

[noise] away.

They would if they had already brought in product.

They would be holding product at a higher cost basis.

Then they would be if they had deferred that decision and took that inventory and.

Post terrorists.

So that says.

As a retailer.

You are advantage to hold inventory levels lower.

Then.

Imbalanced that risk against supply chain risks, which drives companies to want to have a inventories of exciting hot product in hand to avoid the risk of not having access to those products and so that's the calculus, but the there is no benefit to a retailer at this point of loading up in Q3 ahead of the price increases because they've already happened.

Okay.

And then on <unk>.

Yeah on your second plane off as I said before I'm, not really going to make any comments beyond 2019 from from a gross margin perspective, you're right that 25% tariffs are impacting half of our year and our price changes has been structured to hopefully offset part of that incremental tariff costs, but will we have to do an entire full year 2020 plan. Once we understand better what that environment is going to be like before we can make any comments about anything relative to 2020.

Okay. Thank you and then just one more if I mean on the market share you know.

The surveys that I've done as well clearly pointed to drink that I robot into brand that you guys have but is there any data that you have whether it's spelled data at true that suggests that market share with you know pretty much flat.

In the region.

<unk>, Yeah, what we what we said earlier on the call is that in a U.S. We've held our share based on the data were saying the competition doesn't seem to have taken anything in the first half of the year. So we we look at that as a good sign particularly in light of the the segment itself growing more slowly than we had anticipated.

Okay. Thank you.

Thing Yeah, and our next question comes from Mark Strauss or J.P. Morgan or line is now open.

Hey, good morning thing for taking our question.

So you guys have applied for a excludes them from a terror and call and you talk about a compelling case or you know you never believe but it's a compelling case for why that would be granted can you just.

Give a high level overview of why you think it is a compelling case.

Sure.

The I think it is.

[noise] appreciated.

In Washington that the consumer robot industry is a strategically interesting industry to the United States.

And so that they do believe that they would like.

Consumer industry to.

Prosper.

<unk> I robot is the.

Only non China source.

Robots and so that there is no. So we're a hum company a particular interest in.

Leading this.

Leading this emerging opportunity.

And it's recognized that we're at a moment in time.

When winners and losers are determined.

So this is a rapidly growing industry.

Where growth is particularly important.

Relative to competition.

And so that.

Under those circumstances.

I robot.

Which has over half of this revenue in the U.S.N.R. well our competition has most of its revenue in China.

Which is not impacted by terrorists the imposition of terrorist disproportionately.

Slows us down relative to our competition.

And so that fact pattern.

Leads to a a compelling case of exclusion. So if you want we want to help I robot.

Don't slow us down in our primary market.

Relative to our competition I mean that I think that's the the gist of it.

Oh, Okay, well. Thank you. Thank you <unk>.

Talk about the the output from that facility yeah.

Yeah.

Maybe not but.

On a personal.

I'm from high level member, who are entry level, your what's going to be coming out of that that freedom to kind of talk about.

The scale of that relative to what the demand for those parts might be.

So mark our our current plan for 2019 as it's one of our entry level excuse that it will be is targeted to be produced in Malaysia by the end of the year. So it's very limited volumes. This year as we look to just stand that that line up and all the associated processes as we see how that goes will determine how much volume we try to put through that mine in 2020, so that'll be part of our our guidance. We get 420 20 early next year.

Okay that makes sense and then just real quick.

<unk> wearable that'd be manufactured.

That is manufactured in China that is we do not have any plans to move out of China.

Okay, Alright, thank you very much.

You bet.

Thank you and lays a gentleman Miss doesn't pay in our question and answer session I would now like to turn the ball back over to Andy Kramer front end closing remark.

[noise]. Thank you that concludes or second quarter 2019 earnings call look forward to speaking when seeing many of you over the coming months certainly appreciate your support and we'll plan to talk to you again with her in October to discuss or a huge free results.

That completes the call participants may now disconnect.

Good bye.

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