CBAK Energy Technology Inc (CBAT) 2010 Q1 法說會逐字稿

Good morning, everyone, and thank you for joining us on China BAK Battery's first quarter of fiscal year 2010 ended December 31, 2009 conference call. During today's call, we will provide details on the Company's first quarter fiscal year 2010 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 Chief Financial Officer, Mr. Tony Shen. He will be available to answer questions during the question and answer 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 take -- 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 Security and Exchange Commission, as well as the news release that was distributed earlier this morning.

Our statements on this call are made as of January 28, 2010, and the Company undertakes no obligation to update any of the forward-looking statements contained herein, whether as a result of new information, future events, changes and expectations, or otherwise.

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

Thanks, operator. I would like to extend a warm welcome to everyone joining us today. I will be available to answer questions during the Q&A session later on. First, some highlights. Gross margin rose to 19.0% because of improved production yields and cost reduction. BAK Tianjin won its first major contract for high power batteries for electric buses. We won a $27 million bid to directly supply cell phone batteries to ZTE Corporation in the first half of 2010, and our capital structure is strengthened by our $20 million registered direct offering.

Now I would like to reveal the quarter's financial performance in more details. All of the dollar numbers will be in US dollars. Net revenue for the first quarter of FY'10 were $50.2 million, down 12.7% from $57.6 million last quarter and down 26.2% from $68.1 million in the same quarter of last year.

Revenues from cylindrical cells used in notebook computers were $8.1 million, down 46.1% from last quarter, and down 55.9% from same quarter of last year. Revenues from prismatic products, including aluminum case cells, steel case cells and battery packs, which are used in mobile phones and certain personal electronic devices, were $38.8 million, up 3.3% from last quarter, and down 15.1% from same quarter of last year.

Revenue from lithium polymer cells used in personal electronic devices such as PDAs, MP3 players and Bluetooth devices, were $3.2 million in the first quarter, down 35.3% from last quarter, and down 21.2% from same quarter of last year. Gross profit for the first quarter was $9.6 million, up 18.1% from last quarter, and down 19.8% [sic - see press release] from same quarter of last year. Gross margin was 19.0% compared to 14.1% last quarter, and 15.6% in the same quarter of last year. Improved production yield and cost reduction contributed to the rise in gross margin.

Operating expenses totaled $12.4 million, or 24.8% of revenue as compared to $9 million, or 15.7% of revenues same -- last quarter, and $9.8 million, or 14.4% of revenue same quarter of last year. R&D expenses were $1.8 million, or 3.5% of revenue, as compared to 2.8% of revenue last quarter, or -- and 2.1% of revenue in the same quarter of last year.

Sales and marketing expenses were $2 million, or 4% of revenue, as compared to 3.2% of revenue last quarter, or 2.3% of revenue the same quarter of last year. G&A expenses were $8.6 million, or 17.2% of revenue, as compared to 9.7% of revenue last quarter, and 9.9% of revenue same quarter of last year.

Operating loss for this quarter was $2.9 million as compared to the operating loss of $0.9 million last quarter, and an operating income of $0.8 million in the same quarter of last year. Net loss was $3.4 million as compared to a net loss of $1.4 million last quarter, and a net loss of $1.7 million in the same quarter of last year.

Diluted earnings per share were negative $0.06 compared with negative $0.02 last quarter, and negative $0.03 the same quarter of last year. For the first quarter of FY'10 days sales outstanding increased to 139 days from 120 last quarter. And days sales of inventory decreased to -- increased to 162 days from 116 days last quarter.

On December 31, 2009, we had $18.3 million in cash and cash equivalents, and a negative $37.4 million in working capital, reflecting a current ratio of 0.85 to 1. Short term bank loans and long term bank loans totaled $171.9 million as compared to $194.8 million as of September 30, 2009. Shareholders' equity totaled $173.9 million. We had $152.5 million available for borrowing under our credit facilities.

We are pleased to see a strong rebound in gross margin, but we also recognize the challenges ahead. We will continue to improve our operation and prepare for future growth.

Thank you, everyone. I am happy to answer your questions now. Operator.

(Operator Instructions). Your first question comes from the line of Mark Tobin of Roth Capital. Please proceed.

Hi, Tony. How are you?

Hi, Mark. How are you?

Good. Going through a few points; one, any commentary on guidance? You had laid out guidance for 2010 last quarter at $270 million to $310 million in revenue in break-even to slightly profitable on the net income line.

Yes.

Are you maintaining that guidance at this point, or what's your new outlook after Q1?

We have no update on the revenue guidance at this point, and we are also still expecting a break-even year, or a slightly profitable year. As you look through our income statement, and especially our cash flow statement, there was a $4.7 million better provision.

Aside from that, if we were not being hit by that charge, we would have been profitable this quarter. So we are still cautiously optimistic for the whole year.

Okay, and that debt provision hit the G&A line?

Yes.

Okay. On the cylindrical cells, can you give us some color on the down-tick there from --? Both sequentially as well as year-over-year it's down quite substantially?

Yes, recently, the competition in the market in terms of price has been intensifying. Certain manufacturers have lowered their prices aggressively. We, with our gross margin in mind, was more reluctant to lower our price and, therefore, the revenue from that product has declined.

Okay. Can you help us quantify the price decline versus the volume decline?

I think price had declined for -- by around 15% to 20%.

Okay, and I guess --

In the course of several months.

Within the cylindrical segment, the Tier 1 customer relationship, is that still active? Or can you give us some indication of the structure of that? Is there a guaranteed portion of it, or competitive bid?

There's no guaranteed portion of it, but the first Tier 1 customer we gained since last June have indicated that they would increase their orders later on in the spring.

Okay. And the ZTE contract that you announced with this press release, the $27 million, you mentioned deliveries during the first half of '10. Is that calendar or fiscal?

Calendar; that's calendar.

Okay, so that --

We just wondered; we just wondered, and it was announced to us by the customer last week.

Okay, and can you give us an indication of your margin expectations? Are they below what we're at now, or I guess just on a relative basis?

We are not to that stage yet. Normally, for large orders from OEM customers, nominal margin in terms of the quoted price, it's usually slightly lower again individual orders. But then we can compensate that with better planning because larger customers -- larger contracts from larger customers usually come with a better planned indication, so we can arrange our capacity accordingly.

Okay, understood. And then finally on the gross margin line, obviously, very good improvement for the quarter. Within the press release you had some -- talking about challenges and so forth. Can you discuss your outlook or your targets for gross margins for 2010?

We can disclose that, and we actually also are not absolutely clear on how market pricing will change later on in the year. But from the Company standpoint, margins in cylindrical would recover once the order amount -- once our revenue base increase again, which will come very soon. And we expect prismatic to maintain relatively high margin, as shown in this past two quarters. So overall, the trend should be quite positive.

Okay, thank you. I'll jump back in the queue. Thanks, Tony.

Yes, thank you.

Your next question comes from the line of Doug Ruth of Lenox Financial Services. Please proceed.

Good morning, Tony. I guess it's actually good evening to you.

Hi.

Hi, how are you today?

Good.

Let me ask a question. On the website, there's a picture of an iPhone and an iPod. Does that tell us that you're supplying products, batteries to Apple Computer at this point?

We've shipped some samples of polymer cells to Apple. We have not had volume shipment to this customer.

And when did you ship the samples?

Samples? I think it's two or three quarters ago, and it's not -- it's usual discussion stage, so it has no clear impact on our revenue. That's why we did not disclose at that time.

And is there negotiations happening currently with Apple?

Not that I know of.

Okay. In the past, you've talked about getting -- trying to get other Tier 1 manufacturers to buy the cylindrical cells. Is there any update as far as -- like you've talked about perhaps Lenovo or Dell. Is there any --? What can you tell us about other notebook manufacturers?

We have active discussions with all the leading brands. Unfortunately, they don't allow us to disclose their names. But the two you mentioned are generally considered leading brands. We have told investors before that the second Tier 1 customer would come in 2010, probably in the first half of calendar 2010, and that's still our expectation.

That's not the ZTE relationship, is it?

No, no; ZTE is prismatic. It's for cell phones.

Okay, so you --

It is a name brand here in China, but it's a different product.

But you're - you are talking about for notebook batteries; you're optimistic that there'll be a second customer?

Yes; that there will be a second customer of first tier status.

Would that be in your second or third quarter of 2010 then? Is that what you're saying?

We expect that, but no guarantee; but that's still our expectation.

Okay, and can you tell -- give us an update as far as what's happening with the Tianjin facility, and how that order -- the order for the electric buses is coming along?

We have started manufacturing on the products of that contract. As we announced before, it's for $1 million. It's not big as compared to our total revenue, but it's a good start for that product.

And have you provided any batteries so far, or --?

I think we have shipped very advanced stage samples, and it's -- we've started manufacturing the actual orders themselves.

All right. So that's sort of --

It's only 20 batteries. So it's 20 batteries for a total of $1 million. So I would expect that all of them will be shipped at the same time when they're done.

All right, and that's tracking according to plan then, in the fact?

Yes, yes.

Okay, and then you told us is in the past that with the lithium polymer cells, that you would establish the relationship with STL Technology. How has that relationship been developing?

I'm sorry, what's the name of the company again?

I thought it was STL; STL Technology.

We have not mentioned that, actually. We've mentioned that our largest customer for that product is SanDisk.

Okay, and what's happening with SanDisk?

Well, SanDisk is repositioning its own products, so orders given to us have declined. And that's why you see that we had a sequential and a year-over-year decline in polymer cells.

Is that a temporary decline do you think, and that the relationship will grow again?

Well, I think a part of the decline is due to the general financial crisis in North America and all over the western world.

Another part is due to their own repositioning, so I would expect a partial recovery, but probably not back to the same level as before. And we're actively seeking new customers for that.

And can you give us a sense what the utilization is of your factory at this point, your largest factory?

Our prismatic utilization rate is over 80%. So in a generally bad economy, that's considered very good.

And as you can see, our cylindrical and polymer revenue were both down in the most recent quarters, so the utilization rate there in those two products were not great.

Okay, and how about -- I've got two final questions. What is -- can you give us a sense of what's happening with the price of the lithium cobalt?

It has been quite low actually in the recent months. It's around CNY206 per kilo for the last six to eight months.

And does that look like it's going to be stable for a while?

I think so. I think if you looked at oil or any other important industrial materials, they are basically entering into a stable cycle.

Okay, and then the last question, sort of a follow-up to the first question is, can you comment at all about margins and where you think margins may be?

As we mentioned before, margin churn is quite positive. And because of the lower revenue base this quarter for cylindrical and for polymer, especially in cylindrical because it accounts for a larger percentage of total revenue, margin there is understandably low, so --. But branded gross margin for the whole Company still reached 19%. So we would expect that when cylindrical revenue picks up again, the gross margin churn should be more encouraging.

Okay. Well, thank you, Tony, and congratulations on the ZTE win.

Yes, thank you.

(Operator Instructions). You have a follow-up question from the line of Mark Tobin of Roth Capital. Please proceed.

Hi, Tony.

Yes, Mark.

The CapEx target, or CapEx plan for 2010 is still in the $40 million range.

Right now, we are looking at probably a smaller amount, but we don't have a set number yet. We only had $3.9 million in the first fiscal quarter.

Right. And what projects --?

And right now, because of the slightly lower utilization rate, we don't expect the need of more equipment. It's more for maintenance and maybe associated supporting equipment.

Okay, what projects do you have planned for 2010? Is there still work going on in Tianjin?

Construction for Tianjin has stopped. We have two factories, or one factory built. And right now, that factory and the equipment inside that factory are adequate for the small size of production that we are currently having.

Okay, and the Shenzhen R&D center, is that still being developed? What's the status on that?

That one, it has -- the construction has started, but the progress is slow. We are not in a big hurry to finish that.

Okay, and then looking at inventories for the quarter, a pretty big sequential uptick. Is that -- can you give us a sense of how much of that is raw material and how much of that is finished goods sitting on the shelf?

I don't have the exact breakdown, but increased numbers are about [$]3 million for raw materials and about [$]10 million for finished products in cylindrical. As you can see, cylindrical revenue was low this quarter, and that caused the build-up in cylindrical inventory.

And the raw material increased because the purchasing staff kind of foresee an uptick in raw material price probably later in the year, if the US recovery remains robust. So --

On cylindrical, my understanding was that that was the most predictable of your business so I'm a bit surprised to see the finished goods build up. Can -- I guess just help us understand the visibility within that segment and if your customer mix has changed or if it's more of an inventory build [and so] an inventory type of model now.

Actually, the retail sales figures from the 2009/2010 holiday shopping season in the US was quite encouraging, but I guess we were less prepared for the aggressive pricing drop by other manufacturers.

Okay, so within cylindrical, there was business that you walked away from because the margins weren't there?

Yes.

But production continued?

Production did not continue at its full speed, but sometimes with such automatic manufacturing, you have to maintain a minimum size --

Okay.

-- of manufacturing, otherwise, the cost -- the average cost of a unit of product would rise significantly.

And then finally, I guess a month into the second fiscal quarter, what are you seeing from a pricing standpoint within the cylindrical segment?

The consensus in the industry is that it has bottomed out, so there should not be further drops.

Do you expect -- I guess to give us a sense of --? Obviously, we're hopeful for a recovery in the cylindrical segment. Is that --? Do you expect a rapid recovery here in Q2, or this more of a gradual build-up? Assuming the existing customer base, I understand you expect another customer to come in (multiple speakers).

Yes, I think the June quarter would probably be more of a rapid recovery, as you mentioned. The March quarter probably would not be a rapid recovery quarter.

Okay. That's all I have got. Thanks again, Tony.

Thank you.

Your next question comes from the line of Jim Stone of PSK Advisors. Please proceed.

Good morning, at least here, gentlemen.

Hi, how are you?

I called in -- got in just a few minutes late so I missed some of your opening remarks, and I'm sorry if I'm asking you to repeat. But I'd like to get a little more flavor on the cylindrical business. I gather from the last statement that you say most of the losses were -- or reduction in sales were due to pricing issues.

Yes.

Is that correct?

Yes.

Could you give us some flavor in the cylindrical; how those orders are? Do you get long term orders with take or pay type of contracts, or basically is it on demand?

And then could you tell us how the orders split; five customers or 10% of the business, or whatever the factors are in the dispersion of customers?

The supply chain in this product works like this. We sell to packers based in Taiwan, such as our largest customers Sinpro, Dynapac, Cell Experts. These are all Taiwanese companies but with factories in China. And after they pack these cells into boxes of batteries, which you can see in the back of your laptop, they then sell to customers such as Azus, HP, Dell, Apple. We're not saying that we supply to all these customers, but we do have one or two of them.

And so the transparency of the order backlog is with the packers. When we get orders from these packers, we are usually provided by them a look, a peek in the channel for the next three to six months. So there's no guaranteed contract saying that I will buy from you within this year how many cells. But there is a pretty good sense that how many are needed in the coming weeks.

Did that answer your question?

Yes, that's very, very clarifying. I appreciate that. Could you give us some feel on where you are losing in price; how much lower some of the folks might be going compared to where you're saying, whoa, we've got to a make a profit on this stuff?

Actually, we cannot disclose specific pricing.

No, I'm just trying to get a feel of how much lower people are willing to bid rather than what you're willing to bid on a percentage basis; not anything --

Yes, about 5%.

About 5%?

Yes.

Okay, thank you very much.

Thank you.

(Operator Instructions). At this time, there are no further questions.

Okay, so if there are no more questions, I would like to thank everyone for calling in today, and we'll conclude the call.

Thank you for joining today's presentation.You may now disconnect. Have a great day.

Thank you, operator.