CBAK Energy Technology Inc (CBAT) 2010 Q3 法說會逐字稿

Good evening everyone and thank you for joining us on China, BAK Battery's third quarter of fiscal year 2010 ended 30 June 2010 conference call.

During today's call we will provide details on the Company's third quarter fiscal year 2010 result as well as provide a corporate update about recent activities. Today's call will be limited to an hour.

With me today on the call are Mr Xiangqian Li, China BAK's Chairman and Chief Executive Officer, and Mr Jun Zou, China BAK's Chief Financial Officer. Both Mr Li and Mr Zou will be available to answer questions during the Q&A section.

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

Before we get started I'd like to remind our listeners that management's 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 harbour 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 underlining factors as well as risks and uncertainties are listed in filing with the Securities and Exchange Commission as well as the news release that was distributed early today.

Statements made on this call are made as of 28 July 2010 and the Company undertakes no obligations to update any of the forward looking statements obtained herein, whether as a result of new information, future events, changes in expectations or otherwise.

On the call today, management also discusses non-GAAP financial measures to provide investors with a measurement of operating result which are comparable with subsequent periods. A reconciliation of these non-GAAP measures to the corresponding GAAP measure can be found in the earnings result that was distributed yesterday and available on our website.

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

Thank you Miss Operator and thank you everyone for joining us on a call this evening. I have Mr Li, our Chairman and CEO here with me today. He will make opening comments on the Company's strategy after which I will go through our third quarter performance in details.

Then Mr Li and I will be available to answer your questions during the Q&A session. Now, I'd like to turn the call over to Mr Li.

(interpreted) I'd like to welcome all of our shareholders to China BAK fiscal 2010 third quarter earnings call. In the third quarter of 2010 we initiated our internal strategy and made some encouraging progress. I'm pleased to report strong revenue growth, positive operating cash flow and reduce debt levels during the quarter as a result of our management team effort to implement (inaudible) efficiency measures.

In position over the past four years we have invested heavily in strengthening our manufacturing ability in R&D ability. As a result we now have the production line necessary to support our future development in the EV market and the electronic (inaudible).

I'm confident that we will gradually turn around the Company while releasing the overall capacity to the city. With that brief introduction I would like to turn the call over to Jun for a more detailed review of our financial and operational results for the quarter and our outlook for the rest of the fiscal year 2010. Thank you.

Thank you Mr Li. I'd like to review this quarter financial performance in further details. Our net revenue for the third quarter of fiscal 2010 were $58.6 million, an increase of 31% year over year and a 16.1% sequentially.

We recorded a positive operating cash flow of $8.2 million after two quarters of net operating cash flows. That reflects progress made as part of our turnaround plan. We also successfully reduced our debt exposure with the repayment of around $18 million (inaudible) worth of bank loan and implemented efficient capital expenditure controls, which are expanded to reduce our expenditure by 20% at least for the whole year.

Revenue's from our prismatic products, which are using mobile phones and certain personal electronic devices were $42.8 million, up 22.4% from $35 million last quarter and up 51.7% from the same period in fiscal year 2009, which has helped promotion of slow moving inventories to improve our operating cash flow and increase the sales of batteries used in 3G phones.

Sales of our cylindrical cells used in notebook computers was $12.8 million, down 4.6% sequentially and up 0.6% for the same period, for the fiscal year 2009. The decline in cells was due to implementing competitive pricing strategies.

Revenue from our lithium polymer battery used in personal electronic devices such as PDAs and MP3 players and Bluetooth devices were $2.3 million in the third quarter of this fiscal year, up to 32.4% from last quarter and down 32.1% from the same period in fiscal 2009.

Revenues from high-powered lithium batteries used in electrical vehicles - like electrical vehicles such as E-bikes, power tools, power supplies, manufactured in our Tianjin facility were $0.7 million, nearly double from last quarter's figure and up from more than seven times the revenue from the same period of last year.

Increasing demand for batteries used in EVs and Chinese Government's new subsidy program will accelerate the commercialisation of our high-powered batteries. We have successfully completed ISO/TS 16949 certification in May 2010 in Tianjin. There is a specification for quality management systems geared toward manufacture in the supply chains for auto industry and with delays that adherence to the ISO/TS standard will pay off in high quality, low variation and reduce the weight that is (inaudible) our growth in the high-end EV market [plus additional tier one customers].

In addition, in May the US District Court for the northern district of Texas issued an order dismissing China BAK without prejudice from a federal patent infringement suit against A123 systems that had been filed in 2006. As a result of the court's decision we will not be liable for any money through damage and it will not be required to pay royalties to engage in any such production.

Gross loss for the quarter was $1.2 million compared to growth profit of $5.0 million or 11.3% of net revenue for the same period in fiscal year 2009. The decline in growth profit was a result of adopting a competitive pricing strategy for our cylindrical cells to gain market share in the OEM market and to sell off our slow moving inventory at this kind of price offering cash flow.

Also, during the quarter ended 30 June 2010 we recorded a provision for obsolete inventory of $5.6 million. Excluding the impact of this non-cash expense, non-GAAP gross profit for the third quarter with $4.4 million, down 20.2% from non-GAAP gross profits in the same period a year ago.

Our operating expense amounted to $17.2 million or 29.4% off our revenue in the third quarter of this fiscal year, compared to $8.1 million or roughly 16.2% off revenue in the last quarter, and $8.6 million or 19.3% of revenue in the third quarter of last fiscal year.

Operating expenses due in the quarter included an impairment charge of $5.1 million and a provision for doubtful debts of $3.4 million. We reported an operating loss of $18.4 million compared to operating income of $0.9 million in the last quarter and operating loss of $3.6 million in the same quarter of fiscal year 2009.

Excluding the impact of non-cash expenses, including provision for doubtful debts, obsolete inventory and impairment charges related to strategic review of business operation, non-GAAP operating loss was $3.9 million in the third quarter of fiscal year 2010 compared to a non-GAAP operating income of $2.7 million in the last quarter and a non-GAAP operating loss of $37,000 in the same period.

During the quarter we reported a net loss of $18.3 million, or diluted loss per share of $0.29, actually compared to the net loss of $2.6 million, or diluted loss per share, also $0.04 in the last quarter. A net loss of $5.2 million, or diluted loss per share of $0.09 a year ago.

Excluding the impact of non-cash expenses, non-GAAP net loss for the third quarter was $3.8 million or a loss of $0.06 per diluted share, compared to non-GAAP net loss of $686,000 for a loss of $0.01 per share, and a non-GAAP net loss of $1.6 million or a loss of $0.03 in the same period a year ago.

Now, I would like to discuss some key balance sheet items. On 30 June 2010 we had $24.9 million in cash and cash equivalent on the (inaudible). For the third quarter our DSO, day sales outstanding, decreased to 125 from 141 days in last quarter and our day sales inventory decreased to 106 from 169 days in the last quarter.

Short-term bank loans and long-term bank loans totalled $180 million as compared to $198.3 million from 31 March of this year. Shareholders equity total $155.4 million. At the end of quarter we had $66.2 million available for borrowing under our credit facilities.

In conclusion, I'd like to reiterate that we began implementing our turnaround plan in late-May 2010 and have achieved significant improvement in operating efficiency cash flow and leverage with a few weeks. Despite impact of severe price competition in cylindrical battery cells for laptop computers on our short-term profitability we have made good progress penetrating other high-gross margin markets, such as electrical vehicles, power tool applications and also E-bicycles.

We have received orders from the Taiwan's Yulon-motor along with increased order flow from domestic motor manufacturers and we anticipate sales of batteries used in electric buses and the EV to accelerate in the next quarter.

We continue to explore opportunities to further extend and develop our integrated high-power battery development facility in Tianjin and are optimistic that we are entering a growth space and expect to see strong top line growth and improvement in the bottom line in the next two quarters.

With a strong focus on top line growth, cost reduction and [tax control], cash flow generation and balance sheet de-leveraging, we're confident in our ability to return to growth and profitability.

We affirm our revenue guidance for fiscal 2010 of $220 million and maintain positive operating cash flows. We also expect our gross margin to revert to a double digit figure level with our cost control measures and reduced inventory.

I'd like to add that I will be presenting at an upcoming Needham Clean Technology Conference in New York City on 9 August and will encourage interested shareholders, analysts and investors to attend China BAK's presentation at the conference (inaudible) one hour meeting with us.

I thank everyone for participation today. I'm happy to answer any questions you may have. Operator?

(Operator Instructions). Our first question comes from the line of Brian Post, with Roth Capital Partners. Please proceed.

Good morning. A question about the cylindrical business. You mentioned that there's some price competition. I just wanted to know if you could provide more commentary on that, whether you think it's kind of a temporary environment or it may continue going forward and any comments on when you may see that business start to ramp again.

Let me refer this question to our Chairman Mr Li.

(interpreted) Mr Li commented that, you know, we are now focusing on internal cost control and to reduce our production costs with off-set improvement, with (inaudible) improvement and also with [off-set] and materials.

In terms of pricing, he believes it is stabilising right now.

What type of capacity utilisation numbers did you guys run at during the quarter?

In different lines we have different utilisation rates. For our prismatic cells for cell phones, I think it's running at 70% to 80% utilisation rate. For our cylindrical cells it's running at 40% capacity rate. In Tianjin it's at around 60%. Tianjin is our [VIP] facility manufacturing our high-power batteries for EV.

Talking about the business, I'm trying to isolate the new business versus the legacy business. Could you quantify what type of drag that the investment in the new business may be putting on the legacy business? I'm trying to gauge the turnaround efforts of the traditional battery business.

Basically, I guess you know, of course you know Tianjin is definitely an investment our Company has made to grab opportunity in the growing EV market. We all know that the EV market is an [up-starting] opportunity but it's hard to break even just now yet.

So I guess, in one our release items we disclosed a non-cash, non-GAAP operating loss number excluding some cash items. That number is minus $4 million something--

$3.9 million, right.

I believe out of that the EV business probably contributed some $2 million--

Okay.

--of net impact. Then the sales promotion or whatever, you know, sales (inaudible) inventory probably had a $3 million impact on the bottom line. The competitive pricing strategy had a little over $1 million impact on the bottom.

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

Our next question comes from the line of Doug Ruth with Lennox Financial Services. Please proceed.

Hello Jun, I have several questions. Could you give us a little bit of additional colour on what exactly is happening with the electrical buses and vehicles?

Sure. Doug, thanks for the question. On the EV and E-bus market I think our Company are making a lot of progress. As you can see in our revenue number in the quarter, you know, doubled in terms of the last quarter and we do see orders coming from domestic auto manufacturers as well as some overseas manufacturers.

For some more details I will refer discussion to Mr Li.

(interpreted) We have increased orders from our domestic customers. First Auto, one of the largest auto manufacturers in China and also a partner for, you know, our Toyota and Volkswagen and (inaudible)--

You said First, F-I-R-S-T?

First Auto, F-A-W for short, First Auto. They actually partner with Volkswagen and partner with Toyota, manufacture those brands in China. They also have their own brand. So this company has ordered both buses and EVs for their different brands. We also start receiving orders from one of the largest bus companies in the world, [U-Tong], which is a (inaudible) company.

What kind of feedback are you receiving from the customers on the batteries they've received?

(interpreted) So far we have received very positive feedbacks from our customers. We are expecting sales in Tianjin to double yet again the fourth quarter of our fiscal year. Of course, our Chairman's just also mentioned a few other customers, such as Chery Auto. Chery is the largest domestic brand in China.

Our Chairman also said that we are the only domestic battery supplier that aspire to auto manufacture and have not had any major quality issues.

As far as the expansion of the operating margin how quickly could we expect to see some improvement there?

Well, starting from next quarter we'll be able to see improvement on growth margin and operating margin.

Would it be a material number, do you think, for the next quarter?

That depends on how you define material.

It depends on how you define material.

Well, I guess you know, we probably should see some, you know, at least around 10% increase in terms of growth margins.

That I would call material, thank you. Could you talk some about the placing of the lithium cobalt dioxide?

Sure. Let me refer this question to our Chairman.

(interpreted) Our Chairman commented that our lithium cobalt pricing is not high at this moment. It's kind of reaching its [true] or close to its true.

Well, I think it was around $35 in 2009 per pound, and what is the price now approximately?

(interpreted) So it's roughly, I guess, you know, RMB250 per kilo. Sorry, I'm talking in a different sort of system but we can all convert.

Okay, we'll get a math person to work on that one. Could you tell us what your labour rate is per hour?

Labour rate per hour? Well, that varies, of course you know, but it's actually much lower compared to I guess our competitors in Korea, Japan or other places. Roughly, labour cost is probably 6% to 9% of our production costs.

You had told us that you were shooting for a 4% growth in revenue and you're standing by that number, is that correct?

Yeah, I'm standing by our guidance, $222 million for the fiscal year.

Okay. I have one further question. Could you talk a little bit about the prismatic sales in China and also in India?

Prismatic sales, we do see actually an increase of orders from our domestic (inaudible) OEM phone makers. As for India sales, I would refer this question to our Chairman.

(interpreted) Our strategy is actually to sell, you know, high-end products in China, position ourselves as a premium brand, and that's how we see probably an increase in 3G phone orders. In India we actually sell our lower-end products and competing on price.

Okay. Jun, this is a material improvement as far as the disclosure and I'm grateful that you're there and helping the investors.

Thanks a lot. I hope that we will continue to improve.

Okay, that's the end of my questions.

We do have a follow-up question coming from the line of Brian Post with Roth Capital Partners. You may proceed.

Yes, questions about the write down items, the non-cash charges. Were the inventory obsolescence, the bad debts and the asset impairment, were they focused on any particular segment, or were they scattered pretty evenly across the operating segments?

You're talking about both inventory and asset price.

Right.

Well, the inventory actually are sort of spreading across different sectors. We have assessed our entire inventory based on current market situations, estimated fair value base on our understanding of the market. In terms of asset, the majority of them are spreading across different sectors, as we see this as obsolete or (inaudible) obsolete. There are actually roughly $2 million impairment against our (inaudible) business.

Okay, and what about the bad debt, any problem area or was it spread out across all sectors as well?

The bad debt, well basically, in assessment, you know, based on agent and the customer situation not particular to any specific business sector.

Okay, thank you.

(Operator Instructions). At this time we have no questions.

So if there's no further questions then on behalf of the entire China BAK Battery management team, I'd like to thank you for your interest and participation on this call. This concludes China BAK Battery's 2010 third quarter earnings conference call. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation.