IRobot Hits ‘Speed Bump’ in Plans to Move Premium Production to Malaysia

U.S. Trade Representative Robert Lighthizer “made it quite explicit” in congressional testimony last month that any granted List 3 exemptions “would expire at the end of the year,” said Angle. Lighthizer’s testimony “is the most explicit guidance that we have been given,” he said Wednesday after quarterly results.

The company’s “cash position” improved when it recently started receiving “cash payments associated with our tariff refunds” from the Trump administration, said Chief Financial Officer Julie Zeiler. “We anticipate receiving the $57 million in tariff-related refunds owed to us over the next 12 months.” It expects more than 40% of the refunds will come in the next two quarters, though “the timing of these refunds is at the discretion” of Customs and Border Protection, she said.

IRobot is “continuing to push with all energy to drive the diversification of our manufacturing base,” said Angle. The delay in shifting production of premium goods to Malaysia and bringing it to scale “has been one of the impacts of COVID-19,” he said. “There’s travel bans in place” that inhibit “sending people into Malaysia, which has created a delay,” he said. The company is trying to get that work “back on track,” he said. “We do believe that by the end of 2021, we’ll be in a situation where we are effectively geographically diversified and U.S.-China trade policy does not substantially affect our business anymore.”

Getting the levels of factory pricing that iRobot has “enjoyed” in China “may never be fully possible in Malaysia, but we certainly can get closer as volumes ramp,” he said. IRobot successfully moved low-end manufacturing to one production line in Malaysia late in 2019, he said. “That’s ramped up and will represent 20 to 25% of volume headed to North America this year.”

The challenge in 2021 will be getting premium robots in Malaysian production "at the volumes that we need” to bring the cost premiums “down to a level that’s consistent, or at least in the same ballpark, as China manufacturing costs,” said Angle. “That’s going to take the better part of ‘21 to get to.”

The time line is “slower than where we originally began our strategy” in Malaysia, said CFO Zeiler. The company is “constrained” in its ability to get “our engineers in and out of those key manufacturing partners” in Malaysia so it can “work that line transfer,” she said. “So as a result, heading through ’21, we do expect to see that there will be a higher than we had anticipated coat premium.”

The cost differential between Malaysia and China will depend on the “ramp rate,” said Angle. “We’re crossing our fingers that in August, the travel policies of Malaysia will change and we can actually send people into Malaysia. This is a temporary speed bump problem, but it’s not a one-month speed bump problem because of the complexity of building these factories and scaling up production.”

Q2 revenue from premium robots priced $500 and higher grew 43% from a year earlier and was nearly 60% of total revenue for the quarter, said Angle. “Maintaining a clean home has taken on greater prominence during the pandemic,” he said. Revenue from U.S. and Japan sales “exceeded our April expectations,” rising 13% and 43%, respectively, he said. European sales declined 14%, he said.

Japan is a haven for the premium sales that thrived in the quarter, said Angle. Europe is the region of the world most reliant on brick-and-mortar, and stores were shuttered for much of the quarter, he said. Europe’s e-commerce infrastructure also is less “mature” than in other regions, and the system buckled under the weight of demand for essential products during the pandemic, he said.

E-commerce revenue grew about 50% in Q2 and was more than 70% of total quarterly revenue, said Angle. “Our direct-to-consumer business thrived in Q2, growing nearly 160% even as we are only just starting to implement initiatives aimed at enhancing the buying experience.” Sales through Amazon were about 35% of revenue in the quarter.

The “conventional wisdom” suggests e-commerce “tends to skew down” toward low-end sales, said Angle. But iRobot has seen a “very material shift” to the high end in its online sales, he said. “The evidence that we’ve seen in Q2 has been a very clear shift up in mix, which sort of bucks the traditional online trends, and so we’re very pleased with that.”

IRobot customers “shifted their expectations” about the products since 2018, said Angle. They converted from “skepticism” that robotic vacuums were “real” to an “impatience that our robots can’t do more,” he said. The functionality that’s built into iRobot’s higher-end models “I think has really resonated strongly with our customers,” he said. It’s the “extremely valuable features that we have rolled out in our premium products that has driven demand,” he said. Angle hopes the trend will continue for the rest of the year, he said.