CBAK Energy Technology Inc (CBAT) 2008 Q4 法說會逐字稿

Good evening, everyone, and thank you for joining us on the China BAK Battery's fourth quarter and the fiscal year ended September 30, 2008 conference call. During today's call we will be -- provide details on the Company's fourth quarter and fiscal year '08 results as well as provide a corporate update about recent activities. Today's call will be limited to one hour.

With me today on the call is China BAK's senior management team, led by Mr. Xiangqian Li, China BAK's President and Chief Executive Officer. All of them will be available to answer questions during the Q&A session.

Our agenda for today is as follows. Mr. Shen will make remarks on behalf of the management team, on the Company's financial performance and discuss current business strategies, and then he will make remarks about China BAK's business outlook. Finally, we will open the call to your questions.

Before we get started, I would like to remind our listeners that our comments today will contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such written and verbal disclosures are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that could cause actual results to differ [materially] from the anticipated results. These types of statements and [underlying] factors, as well as risks and uncertainties, are listed in filings with the Securities and Exchange Commission as well as the [news] release that was distributed earlier this morning.

Our statements on this call are made as of December 3, 2008, and the Company undertakes no obligations to update any of the forward-looking statements contained herein, whether as a result of new information, future events, changes in expectations or otherwise.

With that said, it is my pleasure to turn the call over to China BAK's CFO, Mr. Shen. You may proceed, sir.

Thanks, Josh. I would like to extend a warm welcome to everyone joining us on this call today. With me here are Mr. Li, CEO, Chairman; and Dr. Mao, COO and CTO. All of us will be available to answer questions during the Q&A session.

First, some highlights. In the fourth quarter of FY '08 China BAK returned to profitability on record revenue of $72.7 million. Gross margin rose to 15.8%, the best level in the last five quarter. Revenue from cylindrical cells used in notebook computers increase to $19.7 million, up 44.2% from last quarter, and now accounted for 27% of total revenue.

Revenue from lithium polymer cells increased to $5.5 million, up 218.7% from last quarter. We raised $16 million in a registered direct offering in August 2008, further improving our capital structure to prepare for tougher financial markets. For the full FY '08 we achieved record revenue of $245.3 million, an increase of 68.2% from FY '07.

Now I would like to review this quarter's financial performance in more details. All of the dollar numbers will be in US dollars.

Net revenue for this quarter of FY '08 were $72.7 million, up 6.2% from last quarter and up 66.2% from the same quarter of last year. Revenue from cylindrical cells used in notebook computers were $19.7 million, up 44.2% from last quarter and up 1588.9% from the same quarter of last year. It accounted for 27% of our total revenue in the quarter. The increase is primarily due to the result of strong market demand and improved quality.

Revenue from prismatic cells used in cellular phones and PDAs, including -- just in cellular phones -- including aluminum-case cells, steel-case cells and battery packs, were $45.0 million, down 14% from last quarter and up 22.7% from same quarter of last year. Within that, revenue from aluminum-case cells were $36.0 million, up 6.6% from last quarter and up 37.8% from the same quarter of last year.

Revenue from steel-case cells was $3.6 million, down 63.7% from last quarter and down 47.9% from the same quarter of last year. Revenue from battery packs were $5.4 million, down 36.8% from last quarter and up 50% from the same quarter of last year. The decrease in revenue from steel-case cells and increase in revenue from aluminum-case cells was a result of implementations of our strategic transition from replacement market to OEM market for cell phones.

Revenue from polymer cells used in personal electronic devices such as PDAs, MP3 players and Bluetooth devices were $8.0 million, up 218.7% from last quarter and up 193.1% from the same quarter of last year. It reflects the maturity of our technology and enhancement of our supply capability in satisfying various customer requirements.

Gross margin for this quarter was $11.5 million, up 36.6% from last quarter and up 85.1% from same quarter of last year. Gross margin was 15.8% compared to 12.3% last quarter and 14.2% same quarter of last year. The increase in gross margin compared to last quarter and the same quarter of last year was attributed to improvement in product mix and rising in average selling price, which outweighed the impact of average cost increase.

Operating expenses totaled $8.4 million or 11.6% of revenue. They represented 12.3% of revenue in the last quarter and 13.2% of revenue in the same quarter of last year.

R&D expenses were $1.7 million or 2.3% of revenue as compared to 2.7% of revenue last quarter and 2.9% of revenue same quarter of last year. Sales and marketing expenses were $1.5 million or 2.2% of revenue as compared to 2.2% of revenue last quarter and 3.3% of revenue in the same quarter of last year.

G&A expenses were $5.2 million or 7.1% of revenue as compared to [7.0]% of revenue last quarter and 7.0% of revenue in the same quarter of last year.

Operating income for the fourth quarter of FY '08 was $3.0 million as compared to an operating loss of $36,000 last quarter and an operating income of $0.4 million same quarter of last year. Net income was $1.5 million in this quarter as compared to a net loss of $2.3 million last quarter and a net loss of $0.8 million the same quarter of last year.

Diluted earnings per share was $0.03 compared with a negative $0.04 per diluted share last quarter and a negative $0.02 per diluted share in the same quarter of last year.

For the fourth quarter of FY '08, days sales outstanding, which is called DSO, decreased to 104 days as compared to 108 days last quarter and inventory turns increased to 3.6 turns from 3.5 turns last quarter. Both of these measures are at their best levels in the last three fiscal years.

For FY '08 net revenue was $245.3 million, up 68.2% from FY '07. Gross profit was $30.9 million or 12.6% of net revenue, up 20.7% from $25.6 million or 17.6% of net revenue for FY '07. And net loss for this year was $7.9 million as compared to a net income of $483,000 for FY '07.

The year-to-year increase in revenue and gross profit is primarily due to a significant increase in sales volume and higher selling price. The year-to-year decrease in gross margin is due to a significant increase in the purchase cost of raw materials, especially lithium cobalt oxide in the first three quarters of FY '08. And besides the impact of lower gross margins, the year-to-year decrease in net income is primarily due to the increase in operating expenses, including the cost in R&D, materials and staff salaries, share-based compensation costs for options granted to employees and higher expense in sales and marketing activities.

On September 30, 2008, we had $35.7 million in cash and working capital of $3.2 million and a current ratio of 1.02-to-1. At year end short-term bank loans and long-term bank loans totaled $170.1 million as compared to $175.7 million. On June 30, 2008, shareholders' equity totaled $167.1 million. The Company had $43.7 million available for borrowing under its credit facilities.

In FY '08 we are pleased to see record revenue and recovering profitability towards the end of the year. Our investment in expansion of the product offerings has brought positive results. Revenue from cylindrical sales achieved strong growth quarter after quarter, and revenue from polymer cells also made breakthroughs. These new products accounted for nearly 40% of our total revenue in the fourth quarter of FY '08 and are still expected to grow in FY '09. We are also pleased to see continued success in transition from replacement market to OEM market for cell phone batteries with revenue from this market increased by over 50% from FY '07.

As a result of the improved product mix and continued cost reductions, gross margin recovered quarter by quarter in FY '08. These achievements are results of the efforts by our employees in all functions and areas and position us to continue our growth trends in FY '09. While we are encouraged by strong growth in revenue and continuous improvement in margin, we also recognize the need for prudent and disciplined management in this challenging financial environment.

In FY '08 we improved our capital structure by raising $30 million in equity offerings, and at the last quarter of FY '08 our DSO and inventory turns were at best levels in the last three fiscal years. We will continue to improve our operating efficiencies, solidify our relationships with the banking and investment communities and achieve our growth goals while managing risks.

I would like to thank everyone for listening today. Mr. Li, Dr. Mao and I are happy to answer any questions you may have.

(Operator instructions). Mark Tobin.

First question, on the FY '09 guidance, in early September you had issued at least revenue guidance for '09, looking for $370 million-$410 million. Can you comment on the status of that guidance as of today?

We do not have any change to an ounce at this time. As you know, there is several forces now in the marketplace affecting the outlook of every company. On the negative side is the financial crisis in the US and most of the other parts of the world probably affecting some customer demand. But also in China, the government has recently initiated stimulation plans of massive amounts, and that will actually create some additional demand, possibly, in our domestic market.

So in this quarter we are closely monitoring demand situation and also the financial situations of our customers and suppliers. And at this time we don't have any conclusive judgments enough to have an update on our guidance.

Where do you view the risk to the guidance, as far as -- what product segment are you most concerned within, mobile handset or notebook computers? Those are really the two areas that are driving the growth going into '09.

There's no specific weakness identified yet.

And secondly, moving on to CapEx, can you share your current CapEx projection for fiscal '09?

Also because of the uncertain market situation for the rest of the year, we have not put a concrete number on CapEx. But I can safely say that it's still to be lower than the fiscal '08 number of $52.4 million. So, if you would put a guess, it's going to be between $30 million to $40 million. And this is highly flexible. Throughout the year we will determine it again by market condition.

Building on that, can you offer some color on what your current capacity is as far? As the funds that have been spent, what has been installed at this point? I know you have two cylinder call lines, one that's running full-tilt and the other that's ramping. Has the equipment for additional lines been purchased? And then also within the Tianjin facility, what exactly is in place there, and what further investment is required?

I think Henry will take this question.

Well, for the cylindrical sales we have four lines installed. With the help of the raise the money, we have four lines each, we can produce 2 million cells a month. And two are running and another two are in ramp-up. So hopefully, we will get all the lines running by end of the march quarter. That's the current situation for the cylindrical sales.

And for Tianjin project, we are also at the stage of ramp-up for polymer cells to sell to the electric bicycle market.

As far as that ramp-up, can you offer a little more color as far as how many lines that is or what type of revenue potential that represents? I'm just trying to understand what has been invested in and what sort of contribution it's capable of making.

Well, as I just said, when the installed capacity for the cylindrical cells for laptop computers is 8 million a month, when it's all finished. It's four lines. And for Tianjin project, we have two [models] to make polymer cells. But the price for each cell, for the different cells, are different even for -- the same cell for different customers, prices can be different. So I can't tell you exactly how much revenue we can create with these lines at this moment. But you can get a rough idea.

Within Tianjin, with the two lines, what is each line capable of producing per month from a unit basis?

That's also different because the Tianjin lines can produce two different sizes of cells. Each of them is -- if we use one type as a standard, it can be, I think it's -- at this moment, we are making about 10 K per day.

10,000 per day.

Yes, 10,000 per day. That ramps up to --

It's a ramp-a process.

Yes, right.

So it's hard to predict how much revenue will come from Tianjin this year.

Yes, that's more difficult to predict. But for these laptop computers you've already got the answers, yes.

Doug Ruth.

Can you give us an update of what's happening with Hewlett-Packard?

I think Henry will also take that question.

Well, we can't say too much about it because we don't have permission to say about HP at this moment. But we are making good progress, that's for sure. And we are close to the [45's], very close.

Are we closer this quarter than we were the prior quarter?

Well, I can't tell you the definite time. But I can tell you, since we started the qualification process, there are so many steps -- many, many, many steps and the [gates] we have to go through. We have passed the last gate, I will say, or last step, finished the last step. And we still have some things we need to finish off.

Was this production audit done? That was something that we were talking about in the conference call in late June.

The production orders is one of the steps.

Okay, is that completed?

I can't tell. It's very, very close.

Very close? Okay. Are the land rights for the industrial park -- is that issue completed?

Yes. We okayed the land-use rights certificate for the Shenzhen Industrial Park, which is our main campus. And then this land-use rights certificate will be used to obtain a property ownership certificate in 2009. And this -- the first certificate that you asked about is also qualified to the possible collateral to be used in loan agreements.

So that would be a source of additional capital, if we needed it?

If needed, yes.

Okay. Can we talk about the cobalt pricing? Where is that at, what has the trend been?

We do have those. For this full year of 2008, fiscal 2008, average price was much higher than 2007. It's an increase of about 65%. As only one of the users or customers for this product, per our suppliers' request, we can't disclose the set prices to you.

Okay, and what is (multiple speakers)

We can tell you how much (multiple speakers) yes, the percentage increase. So the trend for the past year was that the first three quarters were still rising up and the peak was in April, which was our third fiscal quarter.

April 2008 was the highest price?

Yes, it was the highest price. It's almost similar to the price of oil, although there is no scientific relationship between the two.

Very similar, but not as low as that, though.

And how much lower is the price of cobalt, say, in the -- was it in your fourth quarter than in the April quarter?

Fourth quarter was down about 7% from the third quarter.

And where are we at today?

Well, if you count from the peak, it's down more than that; it's nearly 20%.

And what about currently? Where is it at, say, in late November, early December?

That's -- we've got a further -- a few percent down.

Yes, maybe a few more percent, so like 25% (multiple speakers)

Can we talk, then -- I'd like to talk about you. What you did during the last conference call, you actually were talking about some of the relationships with some of the customers. How is the relationship with Foxconn Technology Group and SanDisk? How are those relationships developing?

Well, SanDisk is now our only major customer in the polymer cells product category. And you could see that this quarter polymer cells have $8 million of revenue, more than 10% of the quarter total. So SanDisk is doing really well. Foxconn continues to be a major customer in the cell phone play.

Is SanDisk your number-one customer at this point?

For polymers.

No; for polymer it's the only major customer (multiple speakers) for the whole company. Because polymer is such a small (multiple speakers) portion of our revenue, SanDisk doesn't qualify for our top 10.

And is the relationship going to continue to expand, do you think, with SanDisk?

Yes, yes. You see that cylindrical for notebook computers and polymers for portable electronic devices continue to grow as a percentage of revenue, probably reaching, combined, 50%. And then, with the other 50% coming from cell phone-related battery sales.

And what exactly is happening with Foxconn?

They continue to be a good customer.

Okay. It's stable but not really growing? Is that what you are saying?

It doesn't run into the top 10, either.

And how about the Taiwan computer company ASUSTek.

ASUS actually purchased the cells from one of the packer customers, CELXPERT. CELXPERT, in fiscal 2008, was number six customer, accounting for about 3.5% of revenue. But keep in mind that they began as a customer, I think, in January. Right?

No, no. ASUS started with (inaudible) a customer in May. But CELXPERT has started in January.

In January. So you can see that it's 3.5% of total revenue, is -- that's actually not very indicated because they only have half a year.

ASUS will be more -- buy more and more cells from us.

That relationship, then, should continue to expand?

Oh, yes, for sure.

ASUS will expand, for sure.

But it won't appear in the customer name list, because they actually buy from the [packer] --

They are buying the package, yes.

But they qualified -- the ASUS computers qualified by us, by themselves, none of them (inaudible).

And what about ZTE and HON? How are those relationships developing?

They continue to be our cell phone customers.

Those are both cell phone. And are they buying --

Yes, (inaudible) cell phones.

Are they buying original batteries, or is it still replacement cells?

They are original ones.

And can those relationships expand?

Yes.

And are they in your top 10 customer list?

No.

And then what about Simplo?

Simplo is now the largest customer for cylindrical products and overall number two for the year, for the whole year, of our Company.

Can you tell us a percent of revenue from them, or no?

About 5.5% for the whole year.

And the other issue that was raised is part of -- we were going to get the $370 million to $410 million in revenue for 2009, plus we were going to see that gross margin expand. Can you comment -- how are you feeling about the gross margin and the expansion?

Well, the gross margin expansion comes from two ways. Right? One is the expansion of revenue. The other is the cost structure, meaning from material cost reductions. So material cost reduction is now slowly becoming quite evident. We have had, now, about five months of declining material costs for, lately, (inaudible).

In revenue expansion, as we mentioned earlier, it's not very clear to us right now how the financial crisis will impact our customer or their customers. So we -- it's the same reason that we couldn't, right now, give you a very clear picture on revenue. We cannot give a very clear picture on margins.

The Tianjin facility -- you are focusing, really, I'm just the one product, which is for the electric bikes; is that correct?

Well, no. Actually, we are expanding into two product categories. But we are actually making cells for just electric bikes. The other area would be power tools.

Okay, thank you. That was a good quarter, and we are looking for -- please put out a press release as soon as there's an update on Hewlett-Packard.

Yes, sure. We will, and other customers.

(Operator instructions) Robert [Griffin].

Dr. Griffiths, how are you?

I am well, thank you. I am very pleased with the turn of events in your Company and your return to profitability. And I suspect that much of that has to do with cost of materials as well as increasing margins and these newer lines and decreasing reliance on old lines. But I am concerned that you are so beholden to this roller coaster of raw material costs. Isn't there anything you can do in the way of, say, in buying futures or some other means to level out that cost?

Right now we have some agreements with our suppliers because of our relatively large quantity of purchasing. We can usually have better price and terms than smaller competitors.

In terms of international market hedging, I think it goes both ways. Sometimes such financial engineering or instruments can actually come back to hurt you. So, with our relatively small market cap, our Board of Directors has decided that our involvement in financial instruments should be limited to the existing ones that we are using. So in the foreseeable future we won't be engaging in hedging or futures of commodities. It's also from a corporate governance perspective and from a risk management perspective.

You have seen that some companies run into trouble both ways, when oil was rising and then when oil was plummeting.

Yes; I understand. But isn't there, in the course of time, highs and lows in the price of cobalt, for example?

And also, since our products are now mostly supplied to OEM customers, when raw material cost is higher, our ability to raise price is now also stronger. As you can see that in the September quarter, our average selling price was higher than our June quarter.

So you are better able to pass through these (multiple speakers)?

Yes, though still not to our expectation or not to perfection, but a lot better than, for example, a year ago.

Yes. Well, you certainly got hurt last year by --

Yes. '07 was --

-- by prices.

-- kind of a low point.

And you are going forward at the mercy of that market. And I don't know; it just seemed to me that some small amount of hedging might help your Company.

Well, we will take that (multiple speakers) into consideration. Yes; we can raise the question to the board next time when we decide -- when we discuss.

And at this time I'm showing that there are no more questions available. Actually, we have a [Peter Delgado].

Good morning, guys. Congratulations on a wonderful quarter, given the very difficult current global economic environment. I'm sorry; I joined a call a little bit late here. So please forgive me if this question is repetitive.

I guess the stock has really come down pretty hard with everything else here, around in the range of the 40%-45%. I guess, since October, it kind of feels like that business has really dropped off. Now is that, given what the stock price has done -- down 40%-45% -- is it fair to say that business has dropped off that much? Or is that just --

As you know, stock price is never a very good indication of how the business is doing. I think, as Company management, our general guideline is not to comment on our stock movement. But you can see the market itself has been moving mostly with macroeconomic situations more than individual company business situations.

Absolutely.

So, two to answer your question, business has not dropped.

It was actually the opposite.

Okay, that's wonderful to know, the market is indeed irrational. Can you guys give us any kind of indication as to what your competitors are doing? How are you guys faring against them?

We don't comment on competitors in earnings calls. We only discuss our performance. And also, most of the major players in this field in China have very different growth paths and directions. For example, we are the only one with a very large commercial production of cylindrical cells, and this has been our growth point for the past several quarters. And our competitors may have other new products or focus.

Are you guys planning on coming to the US anytime soon?

Coming to the US in what sense?

You know, I don't know, I'm saying --

I have conferences regularly. Our last one was in, I think I -- well, actually, only earlier this month in Las Vegas.

I do come to the US, but I (multiple speakers) mostly, I go to visit the customers, and very often go to Texas.

: So, any other conferences on the calendar in early 2009?

February -- I don't have the date with me. February in Southern California, Orange County, the Roth Capital Conference.

Ah, the Roth conference, okay, great. Congratulations, guys.

And of course -- yes, Vegas.

Congratulations and keep up the great work, and I look forward to some more profitable quarters.

Mark Tobin.

Just a couple of housekeeping questions for you guys. What kind of tax rate are you expecting for '09?

Tax rate, about 14% to 15%. Was that what I gave you last time?

Yes. Well, I was at 12.5, so it's in the ballpark. And then on finance costs, jumped up quite a bit from Q3. How much of the $3.6 million in finance costs were associated with the raise that you did? I'm trying to get a feel for what's a run rate there, just based on your debt.

It's mostly from rate increase in China. But you also notice that I think it's about a week or 10 days to go until China cut its interest rates by a large margin. So you will see it coming down for the rest of fiscal '09.

And what's the time lag? At what point does your variable debt reset to those lower rates?

We are resetting most of them in this month, December. I think December represents about one third. And then January, another fourth. And then in March there's another one. So I think, by mid-2009 calendar, half of our loans will be reset to lower rates. Of course, there's a long-term portion of our borrowing, and that probably will not change. But that part didn't change when the rate was rising, either.

Right, right. So besides the tax benefit during the quarter, were there any other one-time events that impacted fourth-quarter results?

Not significant, no significant -- none of them significant.

And at this time I'm showing there are no more questions available.

So if there's no more questions, I think we can conclude the call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.