CBAK Energy Technology Inc (CBAT) 2009 Q2 法說會逐字稿

Good evening and thank you for joining us on China Battery (sic - see press release) second-quarter fiscal year 2009 ended March 31, 2009 conference call. During today's call we will provide details on the Company's second-quarter fiscal year 2009 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 in China BAK senior management team, including Mr. Li, China BAK's Chairman and Chief Executive Officer, and Mr. Tony Shen, China BAK's Chief Financial Officer. All of them will be available to answer questions during the Q&A section.

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. 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. All statements on this call are made as of May -- April 28, 2009, 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 and exceptions or otherwise.

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

Thanks. I would like to extend a warm welcome to everyone joining us on the call today. Unfortunately, Mr. Li is on sick leave and couldn't join us. We just found that out. So I will be the only one hosting the call.

First, some highlights. China BAK was accepted into the approved vendor list of an international first-year OEM notebook computer manufacturer during the quarter. We continue to [optimize this] business of our operations and to implement measures to reduce our cost and operational expenses.

We maintained [competent] operating cash flow during this quarter, which has historically been a seasonally slow quarter. Our Tianjin facility received positive market feedback to samples of our lithium-phosphate sales used in electric bicycles, power tools, uninterruptible power supplies and other applications.

Now I will review the quarter's financial performance (inaudible) in more detail. All of the dollar numbers will be in US dollars. Net revenue for this quarter were $40.8 million, down 40.1% from last quarter and down 20.5% from same quarter of last year. The substantial decrease in net revenue over -- as compared to last period was generally due to the global financial crisis and recession, which weakened demand for many of the products that our customers sell.

Revenue from cylindrical cells used in notebook computers and other applications were $9.2 million, down 49.8% from last quarter and up 37.5% from same quarter of last year. Revenue from lithium polymer cells used in personal electronic devices, such as PDAs, MP3 players and Bluetooth devices, where $2.0 million in the second quarter of FY 09, down 49.8% from last quarter and up 3.8% from same quarter of last year.

Revenue from prismatic cells, including aluminum-case cells, steel-case cells and battery packs, were $29.6 million, down 35.4% from last quarter and down 30.7% from same quarter of last year.

Revenue from aluminum-case sales were $23.3 million, down 37.5% from last quarter and down 23.0% from the same quarter of last year.

Revenue from battery packs were $4.8 million, down 11.1% from last quarter and down 26.8% from same quarter of last year. Revenues from steel-case cells were $1.5 million, down 52.6% from last quarter and down 35.0% from the same quarter of last year.

Gross profit for the second quarter of FY 09 was $3.0 million, down 71.5% from last quarter and down 22.8% from same quarter of last year. Gross margin was 7.4% compared to 15.6% last quarter and 7.6% in the same quarter of last year. The decrease in gross margin from this last quarter and from the same quarter of last year was the result of lower average (inaudible) selling prices and lower average manufacturing costs, offset by lower average material costs.

Operating expenses totaled $6.4 million or 15.7% of revenue this quarter as compared to 14.4% of revenue last quarter and 14.8% of revenue in the same quarter of last year.

R&D expenses were $1.1 million or 2.8% of revenue as compared to 2.1% of revenue last quarter and 2.7% of revenue in the same quarter of last year. Sales and marketing expenses were $1.2 million or 2.8% of revenue as compared to 2.3% of revenue last quarter and 2.7% of revenue in the same quarter of last year.

G&A expenses were $4.1 million or 10.1% of revenue as compared to 9.9% of revenue last quarter and 9.4% of revenue in the same quarter of last year.

Operating loss for the second quarter of FY 09 was $3.4 million as compared to operating income of $0.8 million last quarter and an operating loss of $3.7 million in the same quarter of last year.

Net loss was $5.7 million this quarter as compared to net loss of $1.7 million last quarter and a net loss of $6.2 million in same quarter of last year. Diluted earnings per share were negative $0.10 compared with $0.03 per diluted share last quarter and negative $0.12 per diluted share in the same quarter last year.

For the second quarter of FY 09 days sales outstanding increased to 171 days as compared to 103 days last quarter. Days sales of inventory increased to 148 days from 99 days last quarter.

On March 31, 2009 China BAK had $25.4 million in cash and negative $38 million in working capital, reflecting a current ratio of 0.83 to 1. Short-term bank loans and long-term bank loans totaled $172.7 million as compared to $172.2 million on December 31, 2008.

Shareholders equity totaled $161.1 million. China BAK had $75.0 million available for borrowing under its credit facilities.

Our cost and expense reduction plan is on track. This quarter China BAK continued to implement its aggressive cost management program announced earlier this year. As a result, operating expenses decreased by $3.4 million from the first quarter of FY 09, exceeding our $1.5 million cost and expense reduction target. Moreover, our operating expenses were at their lowest level since fiscal year 2007.

Throughout FY 09 prioritization of our product portfolio and aggressive cost and expense reduction will be our focus. We are delighted that a first-year OEM notebook manufacturer determined that our cylindrical cells met their performance and reliability requirements. Also, we believe we will continue to gain marketshare in all products.

We will continue to take appropriate actions to address the downturn in the global economy, as well as the challenges related to weak customer demand. We have implemented aggressive measures to reduce costs and expenses, which will definitely strengthen the company's ability to ride out the recession.

I would like to thank everyone for listening today, and I'm happy to answer any questions you may have.

(Operator Instructions). Mark Tobin, Roth Capital Partners.

First, quickly can you comment on guidance? You had had guidance out there as of the last conference call, and there was no mention in the press release.

We took a far look at the rest of the year and we see that -- we think that visibility is low. Apparently based on calculation it will be quite difficult for us to achieve the previously announced guidance. But we are also not sure how much the new guidance should be at this time, so we chose not to mention anything.

Can you comment on -- on that Tier 1 notebook computer OEM, I know you had expected shipments no later -- at least the previous announcement was no later than the third quarter timeframe. Have those shipments started yet?

Not yet. The expectation is still the same. In the third quarter shipment will start.

Then looking at the quarter, obviously much -- kind of a reversal from the improvement we have seen over the past few quarters. Can you give us a sense of -- do you have a handle on what went wrong during the quarter, as a result are you prepared to take steps to improve?

Specifically I'm looking at cylindrical sales being down 50% Q1 to Q2, and then also 7 -- back to single digit gross margins. I'm just trying to understand what drove that.

There were several forces in play this past quarter. The underlying macro situation is of course the global recession, especially the US is probably the hardest hit. So that experienced weakened demand in notebook computers, and as a result weaker demand for notebook batteries and battery cells, etc.

Fortunately, we still have the domestic market for cell phone, which of course is also down, but not down as severely. Another reason is the seasonality factor. The March quarter is traditionally the weakest quarter of the year. Last year we didn't encounter that, because cylindrical was on its (inaudible) upswing. But this year cylindrical was hit by the recession, as mentioned, so the seasonality factor is once again here.

We saw some uptick in March. In fact, [general and factory] combined did about the same in terms of revenue generation as March. So the churn is encouraging, to put it -- not as optimistic as we all hoped. But we expect the June quarter should be more favorable.

Another reason was this year it is a rare case where -- when Chinese New Year and the calendar New Year falls forth in January. And a lot of companies, including our customers, chose to take the whole month of January off. So that slows down business a little bit too.

How about gross margin?

Gross margin was hard hit this quarter because the volume was low. We had revenue of about $41 million, which is the lowest in the last eight or 9 quarters. And that makes manufacturing cost per unit much higher, more than offsetting the decline in material costs.

Recent cobalt (inaudible) price came down quite significantly this past quarter, but the positive effect was not an offset.

Can you -- I guess again looking at the quarter, can you comment on -- obviously (inaudible) what type of early warning systems do you have in place to give you a heads up on this? It appears that given the inventory levels that this -- the slowdown was somewhat of a surprise to you.

In the last earnings release results conference we announced that we stopped production of prismatic cells for the whole month of January. So we actually had anticipated some slowdown, but unfortunately not enough on the cylindrical side.

If you looked at our inventory level, it is also the lowest in about eight quarters, although day sales of inventory is higher because of the lower revenue. So we took some measures to try our best to offset the downturn, including expense reduction.

You can see that, although revenue is much lower than the same quarter last year, our gross margin was only slightly lower. So that shows that we still tried our efforts.

Were there some order cancellations on the notebook -- on the cylindrical side or -- typically I view that segment as having better visibility than your mobile handset segment. Maybe I am mistaken.

Yes. In general that is true. But the visibility for notebook computer demand has also turned unclear for our customers -- the [packers] in Taiwan. And they in turn gave us shorter time of visibility. In some cases only half of what they forecast -- I mean the time -- the leadtime is only half as long as before.

Is that still the case or have they gone back to more traditional leadtimes?

They have improved a little, but have not gone back to the visibility before the downturn.

Thank you. I will get back in the queue.

Doug Ruth, Lenox Financial.

Could you comment some about your confidence in the ability to gain marketshare?

Yes. In cylindrical for notebooks we got the international first Tier customer that we mentioned. Unfortunately we are still not allowed to publicly mention their name. So this is -- especially at this difficult time, shows that they have confidence in our quality and our ability to supply. And also it it fits their growing need for acceptable quality in lower more favorable priced battery cells. From that angle, we can see that as a newcomer we will gain more marketshare in the market downturn.

Is there any level of commitment to the size of their order for fiscal 2009?

As before, we cannot disclose that. But when shipment day comes near there is definitely more discussion on expected volume.

Okay, do you think that the Company lost market share during the second quarter?

No, we don't think so. The decline is more closely related to market downturn and seasonality. We don't see any competitors gaining significantly, especially not in cylindrical.

Is there any one market segment that you can point to that caused the Q2 to be weak?

Actually, we were weak in terms of revenue in all products. But prismatic cells for cell phones wasn't as weak as the others. One reason being that the Chinese government was quick in implementing its demand stimulus program. Cell phone consumption in China was down, but not as much as people feared.

Is there any upturn in the sales of the batteries for the cell phones? We are starting to hear slightly positive news there.

Yes, March was basically back to the run rate of a regular month more or less, but we continue to see pricing pressure.

What is happening with the price of the cobalt at this point?

It is the mostly low -- lower. This quarter was about 60% of what we paid for as compared to the December quarter.

Can you put a price to that or no?

Yes. This quarter cobalt -- lithium cobalt [outside] price -- for our purchase was CNY189 per kilogram. The December quarter was CNY337 per kilogram.

Do we have the year ago results or same period a year ago?

Yes, year ago same period was CNY410. And two years ago CNY235. So we are slightly lowered than two years ago and much lower -- less than half of a year ago.

Is there any --?

This will translate into cost reduction a few months later, because cobalt -- lithium cobalt dioxide purchased this quarter will most likely be used next quarter for the leadtime -- for products sold next quarter.

Q3 should be -- the margin should be better in Q3?

Well, that is for two reasons. One, as we just mentioned, raw material cost reduction. But also it is likely that our volume would be higher, so that would spread out the fixed costs too.

Are you having any success with any specific customers now?

Beside the customer we just kind of announced, we are actively seeking similar customers and there have been progress. As you can imagine, once one first-tier customer qualify us in the approved vendor list, others will take the cue and speed up their efforts. They are also competing with each other on cost reduction too.

You mentioned very briefly Tianjin. Can you give us anymore color as far as what is happening with that facility?

Tianjin started trial production and provided samples to customers, although the volume is low, because they are samples. There are different kind of samples, not just one kind. So some of them were for electric bicycles, some of them for power tools, and some of them for UPS power supply, uninterruptible power supplies.

Okay, I will let somebody else ask some questions. Thank you very much, Tony.

(Operator Instructions). Doug Ruth, Lenox Financial.

I got back in the queue. I got queued up pretty quick. Could you comment at all about the balance sheet and what the Company feels about that currently?

Well, in this past quarter we actively managed the outstanding loan balance, the everyday balance. Although at quarter end short-term and long-term bank loans together stood at about the same number as the end of December quarter, the average daily balance was lower. That is why our finance cost was about 20% lower than the December quarter.

That also tells you why our cash level at the quarter end was a little bit lower than usual. In fact, if we wanted, we could have a lot more cash on the balance sheet, but then we have to borrow that cash, so we chose not to do that. But we want to assure everyone that we are aware of our balance sheet situation and we will try to reduce the leverage when we could.

Are you in compliance with all the financial covenants at this point? Are we close to --?

Yes, we are. Actually, we got all the bank loans reviewed late last year, as we mentioned in the last conference call. And just recently our banks in China have all upgraded our domestic credit rating by one notch. So that makes the next renewal even more easier.

That's encouraging. Can you comment about the bad debt expense at all?

Yes, the bad debt expense is a concern for us, because the recession has affected some of our customers, mostly in the domestic customer camp. So we have I think about 1 million better expense this quarter on top of about $2 million last quarter. But that we will continue to manage this situation. And fortunately our (inaudible) customer, the cylindrical cell customers don't have any bad debt situation.

Then those numbers remain manageable though, is that correct?

Yes.

Okay, so that is encouraging. Okay, Tony, well, we are looking for bright days ahead and want to see that revenue line continue to increase.

Thank you.

We have no further questions at this time.

Okay. We will wait for a few more minutes and if there are no more questions we will conclude the call. How many callers are on the line now?

You have about 11. (Operator Instructions).

Well, if there is no more questions, we will conclude the call. Thank you everyone for calling in. And thank you, Carla.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.