Stella International Holdings Ltd

HKEX:1836

Earnings Call Analysis

Stella International Posts Mixed 2023 Results

Stella International Holdings Limited reported a mixed financial performance for 2023. In Q4, the unaudited consolidated revenue rose by 13.5% to $389.5 million, fueled by strong shipment volumes which grew 10.9%. However, full-year revenue fell 8.5% to $1,492.7 million, with an 8.9% decline in manufacturing business revenue and an annual shipment volume drop of 12.5%. These changes are in line with a reshaping plan involving product and customer mix adjustments. Furthermore, the Average Selling Price (ASP) increased by 2.1% and 4.2% in Q4 and the full year, respectively. Improved gross margins, production efficiency, and cost controls bolstered the operating margin, keeping the group on track to reach a 10% operating margin and low-teens growth in profit after tax, as forecasted in their 3-year plan.

Stella International Holdings Achieves Strong Q4 Revenue Growth Amid Overall Annual Decline

Stella International Holdings experienced contrasting fortunes in the different parts of 2023. In the last quarter of the year, they saw their unaudited consolidated revenue jump by roughly 13.5% to $389.5 million compared to the same quarter in the previous year. This increase was reflected in the manufacturing business as well, which recorded a similar percentage increase for Q4, reaching revenues of $380.3 million. However, on an annual basis, there was a different picture; the company faced an 8.5% decrease in revenue, dropping to $1,492.7 million for the year, with the manufacturing sector witnessing an 8.9% decline to $1,044.3 million.

Operational Efficiency and Strategic Customer Mix Reshape Leads to Higher Average Selling Price (ASP)

Stella's strategic shift in its customer and product mix played a significant role in its financial performance. A focus on selling differentiated high-quality products allowed the company to increase shipment volumes by 10.9% in Q4, despite a yearly decrease of 12.5% in full-year volumes. The ASP for the company's goods rose by 2.1% to $28.8 in the fourth quarter and even more notably by 4.2% to $29.7 for the entire year. The improved ASP coupled with a strategy that fostered enhanced gross profit margins, superior production efficiency, and robust cost control measures all contributed to a healthy operating margin. The company retains its confidence in reaching the medium-term targets set by its 3-year plan, aiming for an operating margin of 10% and a low teens annualized growth rate in profit after tax.

Unexpected Q4 Volume Boost and Dividend Policy

The fourth quarter brought an unanticipated surge in shipment volumes, which was primarily due to some customers requesting earlier deliveries of products that were originally scheduled for January. These products proved to be popular during the holiday season, compelling the company to expedite shipments that were already manufactured in December. This unexpected volume increase naturally led to an improvement in the full year's financials, particularly the bottom line, as the profits from these additional sales largely flowed straight through to the net profit after tax. This surprise advantage, while boosting the 2023 numbers, also raises the base for comparison in 2024. However, Stella intends to uphold its dividend policy and reward its shareholders accordingly based on the improved performance.

Global Consumption Concerns and Positioning Amidst a Weakening Luxury Market

Amid global signs of a consumption downgrade, not just in China but globally, Stella has remained vigilant. The organization anticipated a weaker retail market in both 2023 and 2024 and built this into their planning. While the luxury market has shown signs of weakening more than before, it remains within the expected parameters set by Stella. The company continues to receive consistent orders from its customers, including those related to new product launches and ramp-ups, indicating a resilient performance even in a challenging retail environment. The importance of launching hit products that can sell through despite a back market has been highlighted as a testament to Stella's strategy and strength in product offerings.

Logistics Resilience in the Face of Red Sea Disruptions

With the rising logistics costs in the Red Sea potentially impacting many companies, Stella provided insights into its operations. As Stella's shipments for the affected EU route were primarily completed in Q4, they have not faced immediate disruptions. Being an FOB (Free On Board) manufacturer, Stella does not typically handle logistics and freight forwarding, thus mitigating the direct impact of such challenges. To date, the company has not received any requests from customers to expedite production or adjust shipping schedules in response to the rising costs. This shows Stella's operational adaptability and the preemptive measures in place to safeguard against logistical uncertainties.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to the Investor Call for Stella International Holdings Limited 2023 Fourth Quarter Update. With us today is Mr. Andy Tam, Group Chief Financial Officer; and Ms. Macy Leung, Head of Investor Relations. [Operator Instructions]. I now invite Macy to begin today's presentation.

[Macy Leung, executive]

Good afternoon, everyone. Thanks for joining the group call for Stella's operation update for the fourth quarter 2023. This is Macy, Head of IR, with me on the call is our CFO, Andy. We will take your questions after we give the operational update. For the 3 months ended 31st December 2023, the group's unaudited consolidated revenue increased by about 13.5% to $389.5 million. For the 12 months ended 31st December 2023, the group's unaudited consolidated revenue decreased by approximately 8.5% to $1,492.7 million. For our manufacturing business, the revenue for the fourth quarter saw an increase of 13.5% to $380.3 million, while the revenue for the full year 2023 decreased by 8.9% to [ 1,044.3 million ]. Our shipment volume for the fourth quarter increased by about 10.9% year-on-year as our differentiated high-quality footwear products continue to deliver strong sell-through for our customers. Shipment volumes for the full year decreased by about 12.5% year-on-year due to the reshaping of the group's product and customer mix as part of our 3-year plan as well as destocking by some customers during the year.

The ASP increased by 2.1% to $28.8 and 4.2% to $29.7, respectively, for the fourth quarter and for the full year which are mostly driven by the changes to the group's customer mix and product mix. This, along with the enhanced gross profit margin, better production efficiency and cost controls supported our operating margin during the period. The group remains confident of reaching the medium-term goals under its 3-year plan of achieving an operating margin of 10% and low teens annualized growth rate on the profit after tax during the 3-year period.

So this ends the presentation today, and we are delighted to answer any questions you may have.

[Operator]

[Operator Instructions]. We'll now take our first question from Carlton Lai. Carlton Lai, please ask your question.

[Carlton Lai, analyst]

Andy and Macy. Just a couple of quick ones. For volumes, it does look like 4Q was a bit of an upside surprise. Can you just talk about why -- like if there was any specific reason why and would you expect an even higher OPM than expected because of the probably operating leverage and also probably a weaker sportswear mix. And so that will probably push it even higher. And then number two is, can you just comment a bit about the just the overall kind of consumption downgrade not just in China, but just kind of globally be cautious sentiment. Does that kind of counteract our -- in our strategy for kind of shooting for high end and luxury? Does that -- are we seeing any changes in terms of our customers positioning perhaps a bit more towards the kind of the middle end segment? And then just lastly, can you just also comment a bit about the -- if you're seeing any disruptions from kind of the Red Sea logistics costs rising right now and if there's any customers that are requesting orders being pushed up front or just airfreight. So I'll stop here.

[Siu Ming Tam, executive]

Great. Thank you, Carlton. Ramirez -- there's an echo. Let's fix the [indiscernible]. Okay. Great. Now we have fixed echo. So on number one, on the volume side, we -- as you know, we were guiding for the full year down 14%, okay. We did, obviously, based on that down probably only 12%, slightly better than expected. Now this comes from actually our customers. A few of the customers requested shipments that were meant for January to be shipped in December, okay, especially last couple of weeks of December. The reason why they did that was they ran our products to sell out of the store. And it's selected customer, it's not everybody. It's just a matter of a -- their product that we made for them were hot seller. And all 3 of them basically had very strong sell-through during the, I guess, holiday season. So they actually ran out of products. So when you go to some of those stores, they will -- oh shit, only have 1 pair of shoes on display, but actually no inventory in the back. So we had to ship them orders that were -- whatever finished goods we had that we finished in December, but we weren't meant to be shipping earlier but really meant to be shipped in January, we shipped them earlier than expected. Now so that -- obviously, a few implications. One is that, obviously, it makes our number better than expected in full year '24 which will have an impact on the bottom line. Because if you think about it, the incremental orders has basically purely the gross profit of that -- those increment orders drops almost basically all the way down to profit after tax after you taking the tax rate, okay? There's not a lot of operating cost related to those because all those operating costs were incurred typically will be booked in '24. So it's definitely much higher into the net margin incrementally, which sounds great for '23, but obviously, makes the base with '23 higher for our 2024 comparison. Okay?

So we shipped some volume earlier than expected. This going to definitely make our '23 number higher than expected, which, of course, we'll be more than happy to pay the appropriate dividend based on that because we don't change our dividend policy for that. So -- but that's, I think, really the strength of, I would say, the customers or the particular products that we make for them. It is not a -- I would say, on your [indiscernible] question, a general I would say, categorization for the global consumption market and also luxury. As we all know, I think the market has been weak and luxury has I would say, weaker. I was starting at least weakening than, say, earlier in the year, obviously. And we didn't expect '23 to be a great retail market. We don't expect '24 to be a retail market. That was the assumption we went into when we did our budget in the first place for next year. So we actually -- this is -- what we see now is actually within our expectation of what the market looks like. It's not a surprise to us. Enough of our customers have told us that they thought '23 was weak, '24 is not better. But if anything, our customers will still continue to -- are still continuing placing orders with us, a lot of them are some new ramp-ups in terms of ramping up their product, they just launched. And like it goes to show even in the back retail market. When you launch a hit product, it will sell through. And so it's great for our customers, and we are more than happy to support that.

In terms of -- so far, we don't see any big impact for '24 in terms of even within this dynamic. I think across the various category, while luxury sounds weaker than normal than before, it is, but it's within our expectations. Again, there's new launches that we have with some customers and also some ramp-ups for next year for some customers. So we're pretty full for -- actually, we're pretty full definitely for non-sports side of the business. No change there. In terms of disruption, the Red Sea logistics, that only really goes for the, I would say, European route, the EU route. Right now, and obviously, we shipped most of our [ lux ] Q4 products already to Europe. And that's mainly lux -- more luxury and fashion related. Second half is more luxury and fashion related. so far, we don't have a disruption and we haven't got any request from our customers to say, produced earlier or what not to have -- to anticipate a longer journey around bypassing the Red Sea logistics side. But given we're an FOB manufacturer, we don't really deal the logistics and freight forwarding in this case. So for us, not much impact. Normally, if something like this happens, they might ask us to produced earlier and shipped them to them earlier, so they can schedule a boat earlier, but we haven't gotten any of that request yet.

[Carlton Lai, analyst]

Got it. Just one quick follow-up. Regarding sports side -- because I think your largest customer was also a bit more cautious on the commentary for 2024. So have we seen any -- or is this within expectations? Or has this changed our outlook in any way?

[Siu Ming Tam, executive]

No, it's within expectations. No change. It's pretty much what they told us before and no much -- not much -- no much changes, not better, not worse for 2024.

[Operator]

The next question comes from Alice Cai of Citi.

[Unknown Analyst]

Andy, congratulations on the Q4 performance, they are nice. And observing the current results, the group chair has so impressive performance. I'm aware that the company is intensify the measurement in retail. I would like to inquire about the company's plan regarding the retail sector. And specifically, when is anticipating that the retail division can be closed or paid up.

[Siu Ming Tam, executive]

Thanks, Alice. Since I've joined in 2020, when we look -- we started developing a strategy plan for 2025. So it's been almost 5 years, almost 4 years for me, but by the time I get to 2025, it's almost 6 years for me be at the company. One of the focus is not retail. And we want to focus on footwear manufacturing, number one. Number two, if anything, we're incubating our handbag accessory business. Number 3 was really not about reinvesting or allocating capital to retail. So as you see over the last few years. You see there's a lot more, I would say, shutdown related losses on the retail segment. It's not like you can exit right away. I wish I can, but you can't exactly do that, takes some time. So I think by end of this 2023, I think by the time we talked about in 2024 and the annual results in March, we'll talk more about what we've done, but really it's about shutting down when we have shut down most of the Asian business, pretty much everything in Europe, wholesale and even direct stores. And only things we might have for such in China in our JV that we have, given we have a JV partner, we can't -- as us also owing 40%, you can't exit right away. But that's something we've been actually minimizing the footprint even in the China side. So overall, hopefully, we can get to a point where we might still have Stella brand and product just for marketing purpose, but not really a retail segment and it doesn't really take any of our management time. It's not our focus right now for our business.

[Unknown Analyst]

Okay. And I have another question. Could you please give us guidance about 2024?

[Siu Ming Tam, executive]

For 2024, I think right now, we -- I mean, honestly, we just had a Board meeting today on our budget. So it's so fresh. They are obvious, there are some comments. I won't go into too much detail in terms of guidance. But one thing I would say is that on the non-sports side of the business, our factories are full. We are fully booked for 2024. Issue is in -- I would say people would ask, hey, what if the retail market downturn? Do you see any cancellation or delay. The issue we have in '24 is too many orders and not enough capacity. So we actually turned down some of the order that were -- that some of our customers are hoping to build up with us. We just don't have capacity for them. So we had to have some really tough conversations with our customers this past few months to see how much capacity to get. And obviously, if there's some movements for 2024, we might reallocate if any capacity that becomes idle to another customer that we couldn't give capacity for. So we don't see that as a really big problem in '24 on the non-sports side. And that's also going to be very minimal, I would say, increase in capacity. There will be some ramp-up in the solo factory in Indonesia because we want to ramp up that capacity to free up Vietnam to do more. At the same time though, the Indonesian factory when we move some brands there, we got to make sure the quality, the operation is exactly up to our standards. So that is very important for the first half and we actually sent some of the more senior people there. And now we've been leader actually in Indonesia. So we're going to make sure that everything goes smoothly during that time in the first half.

On the sports side, our largest customer obviously had a decrease in volume in '23. But if anything, I think the inventory has improved, and like we talked about, I think, ending December, our utilization is back to 80%. And that's probably exact sew no expectation changes. It's still exactly what we've been told that it's going to happen. So overall, there will be some volume increase because of our sports customer. But on the non-sports side, there will actually be technically an output volume decrease not because -- the factory is not full. It's because we're doing slightly more luxury and high-end fashion, and we reallocate in the capacity that -- the limiting capacity we have to more higher margin customer. So that's why you have an offset volume decrease from that side. So net-net, you might be relatively flat or up probably mid-single digit on the volume side. I imagine because of the sports customer increasing as a share, that will typically drag our ASP, as group average lower. But overall, we're still pretty committed to growing our profit after tax in the low teens even for next year. I don't think there's a lot of risk to that from our perspective right now.

[Unknown Analyst]

And sorry, I have a follow-up question. And could we expect to see a stronger performance on the casual segment moving this year due to the consumption downgrade.

[Siu Ming Tam, executive]

Funny thing is in 2023, there is inventory that we knew about back in Q4 2022, the casual customer would probably be the first ones to, I would say, hit their long ball. And they would have really fret conversation with us about, hey, there's going to be inventory across all segments in Q4, Christmas season, 2022. So they were actually pretty ahead of the game in terms of discounting before everyone else does. So their discounting hurt so much. And actually cleared the inventory earlier. At this point in time, they're actually pretty healthy going into 2024. The funny thing is that they actually want to increase production or orders placement of us, but we actually just don't have capacity. So until our Bangladesh factory comes online end of 2024, we actually don't have incremental capacity for them. And we have to actually take some capacity away from them, from that segment to offer to other customers. because we were kind of balancing capacity and kind of at the same time, customer relationships and things like that. So we had to reallocate some capacity. But overall, actually, the casual segment is actually relatively healthy, at least the customers we work with.

[Operator]

We will take the next question from Kai Sheng of Haitong Securities.

[Kai Sheng, analyst]

This is Kai from Haitong. My first question -- just mention that actually, we have some customers actually running out of stock and they want some early delivery in December and in the meanwhile maybe it's from luxury or casual sportswear. And my second question next about the ASP trend in 2024, if we [indiscernible] half of inventories.

[Siu Ming Tam, executive]

Yes. In terms of category, it's mainly luxury and kind of the high-end fashion. They're more of the new customers that we are working with and the product they had I can say either one, they didn't order enough or they didn't expect the reception is that positive? Or number two -- number one is underestimated. But number two is, even if they ask for more replugging our capacity for them in 2023, to be honest, because they were new customer and they want to slowly ramp and we totally understand that. But -- so their products sold really well. So it's just really, I think, the more specific product than anything else. In terms of ASP, there's an offsetting effect, okay? On the sports side, the ASP is going to be lower, okay? So yes, it's going to be lower within the segment itself, but also because that mix will increase. So there is a higher mix increase of lower ASP products. that will, overall, obviously, put a drag on ASP, offsetting by as we do more luxury and fashion on the non-sport side, that's going to actually raise ASPs. Right now, when we look at the 2 offset is basically pretty much flat at this point for 2024 on a group basis.

[Kai Sheng, analyst]

Okay. I understand. And I have a follow-up question. because we have seen a weaker momentum in terms of fluctuate. Do we still have develop maybe some other luxury customers so as to offset the impact?

[Siu Ming Tam, executive]

Well, I would like to win a lot more luxury customer. All I know is that in the fashion show in Paris in September, there were -- every single brand had, I would say, fashion product, fashion sneaker product on display on a runway. We don't do business with most of them. So most likely, they are doing business -- making those products on their own. So I would love to win more customers and there's a pretty big opportunity for us to do that.

[Operator]

We'll take the next question from Darren Yuen of Chartwell Capital.

[Unknown Analyst]

Andy, got a few questions for you. I think, obviously, by now, we've had discussions with most of our customers about the outlook for this year. But I just wanted to ask if in case something does happen, how much can our customers kind of deviate from the initial budget? I mean, I know that we maybe have some other brands that could take over that capacity, but I was just curious how that normally works. Is there like a certain percentage of their orders that they have to stick to no matter what? Yes, that's my first question.

[Siu Ming Tam, executive]

Great. On that topic, is -- the conversation very dependent on, say, per brand, how big they are, how we work with them and stuff like that. But in general when we're looking at our first half, our order book is -- obviously people only book you once or -- so when you book a PO, that's confirmed. So you cancel, you gotta pay for it. Second half -- sorry, second quarter will be pretty much not completely full year, but already getting there, but it's more like a timing. So people order probably anywhere from 3 to 6 months ahead of time or putting a confirmed purchase order. But before at the beginning of the year, when we do the budget, of course, when you ask everyone how much capacity do you need? And we come to a point where last year and also this year, we have limited capacity growth on the non-sports side. So basically, our conversation this year and last year is similar where if you got committed capacity, there might be some charges if you don't fulfill it. But to be honest, we have so many orders that we couldn't fulfill that if you cancel, we just ship it someone else. Now looking at luxury and fashion, both of those production comes in the fall inventory. When you think about what you're seeing now, right now, you've already seen the pre-fall fashion show. Now you're seeing fall winter fashion show. The brands are putting out the products onto the market in display saying that these products are coming out of the [ fall ]. I would say very unlikely they will not have those products in the store, because there's kind of no point of doing all this marketing and then you actually don't launch the product when you need to make money. So you already spent on the marketing cost. And the product cost, to be honest, is not the biggest cost for a luxury fashion brand, the marketing cost is. So I imagine there's probably not a lot of deviation to be honest for the fall/winter side, especially for luxury and fashion.

[Unknown Analyst]

Okay. And following up on luxury, high-end fashion, do we still kind of expect those orders to be more back loaded going into 2024? Because I know -- I think for 2023, that was the case.

[Siu Ming Tam, executive]

In general, they are -- was back-end loaded. Just the cycle of the luxury and fashion houses launches.

[Unknown Analyst]

Okay. Got you. And then I wanted to check on our CapEx outlook for 2024. Are we still at around $100 million to $120 million.

[Siu Ming Tam, executive]

Yes, we're still finalizing our CapEx. I would like to have them to spend on the higher end, $120 million. So that means our -- does put more progress on our -- or faster progress for our factories. But best about the same range that we're looking at 2024.

[Unknown Analyst]

Okay. And how is that being allocated? Is it -- I mean Bangladesh should be pretty much done, right? So is it being invested in Indonesia or elsewhere?

[Siu Ming Tam, executive]

Yes. Obviously, the Indonesian factory that we talked about will be a big consumption that probably half of that CapEx. And the remaining half is basically like maintenance and Bangladesh.

[Unknown Analyst]

Okay. Got you. And then because we kind of have a larger CapEx this year, would we mind dipping into our cash reserves a bit if we need to, to pay our dividend. I think our [indiscernible] is pretty high anyway.

[Siu Ming Tam, executive]

Yes. The CapEx that we're supposed -- or cash that we're supposed to use for both Indonesia project and also Bangladesh is already on the balance sheet. Okay. And we'll report 2023, you see cash as excess to this not saving then we'll be holding for the CapEx, it's just the CapEx [indiscernible]. So it's not -- we don't need any cash flow from operations to fund this additional CapEx the cash [indiscernible] then.

[Unknown Analyst]

Okay. And then finally, as we kind of optimize our production layout, should we expect any material change in our tax rate going down the line?

[Siu Ming Tam, executive]

It's not a -- tax rate shouldn't be going down. If anything, it should be good. Eventually, I imagine around the world, everyone be paying 15% at least for the -- under the GMT. Now the status of that is not as quickly as we thought. We actually thought by now like everybody to be 15%, but given the wars and given the U.S. has not really participated that has been kind of put on hold, I would say. Some countries have done 15 -- adopt the 15% GMT. But at the end of the day, they're not in the U.S. The U.S. is most important. But you see tax rate in any jurisdiction slightly go up, and I can't imagine anyone to be having a tax entity or structure that doesn't pay 15% -- at least 15% at the end of the day. So next year, we'll probably see about 13% tax rate. I don't know when we will get to 15%, it really depends on, honestly, how fast GMT gets rolled out across the world.

[Operator]

[Operator Instructions]. We will take a follow-up question from Alice Cai of Citi.

[Unknown Analyst]

Andy, I have a follow-up question on the CapEx, just mentioned. You mentioned that half of the capacity will be put into the new factory in Indonesia. I want to ask, when is the new factory expected to put into operation, 2025?

[Siu Ming Tam, executive]

Yes. The newest sports factory, they're starting building construction on a clear land. The schedule is probably at the beginning of 2026. That's kind of current schedule, but that's a few years away. I'm not sure if there's any delay or move forward, but I think at least at the beginning of 2026 will that factory come online.

[Unknown Analyst]

So $60 million put in to this factory and another $60 million 2025.

[Siu Ming Tam, executive]

Yes, that sounds about right. I think our CapEx for 2024 and 2025 will be about the same range, $100 million, $120 basically.

[Operator]

We'll take the next question from Scott [indiscernible] of Madison Group.

[Unknown Analyst]

[Foreign Language].

[Operator]

Can you ask in English?

[Unknown Analyst]

I want to ask...

[Siu Ming Tam, executive]

Scott, why don't you ask in Mandarin? I will respond in English, but Macy will help me translate.

[Unknown Analyst]

[Foreign Language].

[Siu Ming Tam, executive]

Okay. So the handbag side, we are incubating our handbag business. We have a facility in Vienna. We have a facility in Philippines. Right now, this remaining 2 years, '24, '25, we are making sure the quality for the factory is up to the standard that we approved until we start cross-selling that services and production capacity to our luxury and high-end fashion. We want to make sure the quality is good. And before we actually step up in terms of that. But we do -- it is improving, improving a lot, quite a bit in 2023, and we expect that to continue improving in 2024. In terms of plan for bigger handbag in such a factory, that will probably come in the next 3-year plan post 2025. So we'll talk more about that when we get that [ stitched ].

[Unknown Analyst]

[Foreign Language].

[Siu Ming Tam, executive]

The handbag accessory factory is already making money. They made money -- actually, when us in the first year, we took over, we we're over breakeven and made a little bit of money. And last year, we probably make about $2 million profit after tax. So it's already making money. And of anything, it will be better over time.

[Operator]

[Operator Instructions]. We'll take the next question from Ricky Chen. Please go ahead.

[Unknown Analyst]

Andy and Macy. I just want to follow up on the '24 guidance. Correct me if I'm wrong, but I think you mentioned that the volume will be flat or up to mid-single-digit growth and ASP that's like flat or something. And you also mentioned the low teens after-tax profit. So I just wonder how would our GP margin and OP margin look like, especially given that you mentioned that we're having a higher base for '23.

[Siu Ming Tam, executive]

Okay. So the high -- I think why we talk about volume being flat because I almost have almost a 1 million pair of shoes that suppose we ship this month to last month, okay? Otherwise, it wouldn't be flat. But actually, we're not looking at a flat, but it's really more really low single-digits to maybe like mid-single-digit at this point in the volume, not because really the million pairs of -- extra pairs of shoes supposed to go into [ wearing ]. So that creates a high base, okay? But even with that, we still are guiding profit after tax in the low teens because there's obviously gross margin improvement, but also efficiency in our kind of overall structure that we've been continuing doing. And there's a lot of different things that the operation we're doing. Our R&D cost is going to go up, but it's going to go up in a way where dollars spent per -- when we [ tie ] the luxury and fashion where most R&D has been done, much more efficient, okay? So some of that volume in scale. It was our new customer who launched the product in a couple of years. Next year, it's going to be bigger, but then the product development costs get spread out over more volume. So we're actually going to have some operating leverage from that. And you expect that once a customer starts to mature, you get that kind of operating leverage and then do more volumes per se.

And also, just internally, we've been -- since I think Steven and I have taken over, we're really looking at the internal structure and removing a lot of silos and consolidating the teams and making sure we have standard excellence in business development, account management and order planning also supply chain management and QA/QC so control, which is all centralized now, instead of individual factory. So from there, we're able to really rationalize a lot of people and actually really improve the process and quality. But now we're actually moving to the next step we're making the job more efficient by being more digital. Okay? So some of that initiative have actually been in place. And now it's just like now you start to see, I guess, the benefit from that. So that's why our operating margin will improve next year, definitely, for sure, as a part of -- because of gross margin by customer mix and product, but also some of these initiatives we've been doing.

[Operator]

[Operator Instructions]. It appears there are no more questions. Andy or Macy, do you have any final comments?

[Siu Ming Tam, executive]

Okay. Well, great. This is only a Q4 update. We are still looking to close our numbers for -- we then also go through our order process for our other. So when we talk about March annual results, we'll talk about more margins in detail and, of course, a much clearer outlook for 2024. By that time, our order book is probably almost filled for up to Q3. So we'll have more discussion at that time. So thank you very much, guys.

[Operator]

Thank you very much. Thank you for joining us today. Please have a pleasant evening. You may now disconnect.