CBAK Energy Technology Inc (CBAT) 2010 Q4 法說會逐字稿

Good morning, everyone, and thank you for joining us on China BAK Battery's Fourth Quarter and Fiscal Year Ended September 30, 2010 Conference Call. During today's call we will provide details on the Company's fourth quarter and fiscal year 2010 results, as well as provide a corporate update about recent activities. Today's call will be limited to an hour.

With me on the call today 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 would 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 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 risk and uncertainties are listed in filings with the Securities and Exchange Commission, as well as in news release that was distributed earlier today.

Statements made on this call are made as of November 30, 2010, 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.

On the call today management also discusses non-GAAP financial measures to provide investors with a measurement of operating results which are comparable with subsequent periods. A reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the earnings release that was distributed earlier today 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. Please go ahead.

Thank you, operator. (spoken in Mandarin)

(interpreted) Thank you, operator. I would like to welcome all of our shareholders to China BAK's fourth quarter and fiscal year 2010 earnings call.

This year, 2010 marks an important year for China BAD as our management team implemented a turnaround strategy and effort to improve financial performance and resume growth trajectory. As part of an aggressive cost management program to reduce debt expenses we adjusted our long-term and short-term bank loan structure resulting in lower debt level and reducing financial costs. We also enhanced our efficient and financial system procedure and controls during the same year.

We expanded our production of battery packs directly supplied to OEM cell phone makers, which is now our second largest revenue contributor. Due to strong customer demand we plan to expand our production capacity of BAK brand battery packs in fiscal year 2011.

I am also pleased to note that the following, that the following years of investment in intensive research and development efforts to develop high-power lithium-phosphate batteries we are now beginning to see sizable interest from our target market. Our Tianjin facility has entered into supply contracts with China's leading electrical vehicles and e-bike manufacturers, including Chery and Geoby Electric. We are well positioned in the EV market and expect to generate additional revenue and increased market share as high quality of our products generates our market recognition acceptance.

In fiscal year 2011 we will continue to focus on implementing our turnaround plan which focuses on revenue growth in each segment, restructuring operations in an effort to streamline resources and improve cost efficiency. We are confident that China BAK will successfully complete a turnaround and reach its next level of growth in fiscal year 2011.

With that brief introduction I would like now to hand over this call to Mr. Zou who will present an overview of our financial and operation results for the fourth quarter and fiscal year 2010.

Thank you, Mr. Li, and welcome, everyone to China BAK's fourth quarter and fiscal year 2010 earnings conference call.

For fiscal year 2010 we reported net revenue of approximately $215 million, up 1.5%, or 1.7% from $211 million in fiscal year 2009. However, revenue was slightly below our guidance of $220 million for fiscal year 2010. This was large due to less than expected revenue contribution from cylindrical cells segment which was facing competitive market condition and pricing pressures, especially from global tier one OEM makers. Therefore we adopted a competitive pricing strategy to maintain amount of share in the OEM market (inaudible) a lower revenue contribution.

On a positive note, we did not lose any of our existing customers to those competitors and most importantly we gained valuable business from additional OEM customers such as Taiwan Zero Moto. Also, we continue with continued success from our turnaround strategy and related efficiency measures. We reported another quarter of positive operating cash flow of $4.5 million. We also implemented efficient control on capital expenditures which stood at $23 million, down by more than 44% in the fiscal year 2010.

Now I will review this quarter's financial performance in further detail. Our net revenue for the fourth quarter of fiscal year 2010 were $55.6 million, down 3.4% from $57.6 million for the same period in fiscal year 2009.

Revenues from our prismatic products, which are used in mobile phones and certain personal electronic devices, were $43.1 million, up 0.7% from $42.8 million last quarter and up 14.8% from $37.5 million for the same period of last year, which is mainly driven by increased sales to OEM customers.

Revenues from cylindrical cells used in notebook computers were $8.9 million, down 30% from $12.8 million sequentially and down 40.9% from $15 million for the same period last year. Such a decline in revenue was mainly attributable to decreasing our average selling price due to temporary pricing competition strategy to maintain our market share in OEM market.

Revenue from lithium polymer cells, used in personal electronic devices such as PDAs, MP3 players and Bluetooth devices, were $3.0 million, up 30% Q-Q down almost 40% year-over-year.

Revenue from high-power lithium-ion battery cells, used in electrical vehicles, light electrical vehicles such as 3-bicycle, power tools, UPS manufactured at our Tianjin facility were $0.6 million, down 9.7% from last quarter and up more than nine times the revenue from the same period last year. For fiscal 2010, revenue from this segment reached $1.8 million compared to only $0.2 million in fiscal 2009.

Such growth is largely driven by increased demand, interest in our products and resulting small scale cell orders. As noted by Mr. Li, BAK Tianjin signed a contract with Chery Automobile Ltd., Geoby Electrical Vehicle Corporation Ltd. and China Sanke Electrical Ltd. to supply high-power lithium-ion phosphate batteries for use in their EV e-bike and uninterruptible power supplies, respectively.

Gross profit for the fourth quarter of fiscal year 2010 was $5.3 million, or 9.5% of net revenues, compared to gross loss of $1.2 million in the last quarter and gross profit of $8.1 million, or 14.1% of net revenue in the fourth quarter of fiscal 2009. The sequential improvement in gross margin was mainly attributable to recovery of stock provision of $0.7 million in the fourth quarter of fiscal 2010, compared with a provision for obsolete inventory of $5.6 million in the last quarter.

The year-over-year decline in gross profit was a result of adoption of a competitive pricing strategy for cylindrical cells segment to maintain our market share in the OEM market.

Operating expense totaled $12.6 million, or 22.6% of revenue in the fourth quarter compared to $17.2 million, or 29.4% of revenue in the last quarter and $9.0 million, or 15.7% of revenue in the fourth quarter of fiscal 2009. Operating expense in the fourth quarter of fiscal 2010 included an impairment charge of $2.0 million and a provision for doubtful debts of $1.3 million, compared with an impairment charge of $5.1 million and a provision for doubtful debts of $3.4 million in the last quarter and a provision for doubtful debts of $1.9 million in the fourth quarter of 2009.

We reported an operating loss of $7.3 million compared to $18.4 million in the last quarter and $0.9 million in the same quarter of fiscal year 2009. Excluding the impact of non-cash items, including provision for doubtful debt, obsolete inventories and impairment charges related to strategic review of business operations, non-GAAP operating loss was $3.3 million in the fourth quarter of fiscal year 2010, compared to non-GAAP operating loss of $3.9 million in the last quarter and non-GAAP operating income of $3.6 million in the same period a year ago.

Net loss was $8.6 million or diluted loss per share of $0.14 in the fourth quarter of fiscal year 2010, compared to a net loss of $18.3 million or diluted loss per share of $0.29, in the last quarter a net loss of $1.4 million or diluted loss per share of $0.02 in the same quarter of fiscal year 2009. Excluding the impact of non-cash items, non-GAAP net loss for the fourth quarter of fiscal 2010 was $4.6 million or a loss of $0.08 per diluted share, compared to non-GAAP net loss of $3.8 million in the previous quarter, or a loss of $0.06 per diluted share, and non-GAAP net income of $3.2 million, or earnings of $0.06 per diluted share in the same period a year ago.

I will now provide a few highlights for fiscal year 2010 results. For fiscal year 2010, net revenues were $214.8 million, up 1.7% from $211.1 million in fiscal 2009. Gross profit was $22.7 million or 10.6% of net revenues, down 15.3% from $26.8 million or 12.7% of net revenues for fiscal 2009.

Operating loss was $27.7 million compared to $7 million in fiscal 2009. Excluding the impact of non-cash items, non-GAAP operating loss was $1.8 million in fiscal 2010, compared to non-GAAP operating income of $5.3 million in fiscal 2009. Net loss was $32.8 million, or diluted loss per share of $0.53, compared to a net loss of $14 million, or diluted loss per share of $0.25 in fiscal 2009.

Excluding the impact of non-cash items, non-GAAP net loss for fiscal 2010 were $6.8 million, or a loss of $0.11 per diluted share, compared to non-GAAP net loss of $1.6 million, or a loss of $0.02 per diluted share in fiscal 2009.

Now I would like to discuss key balance sheet items. On September 30, 2010 we had $22.6 million in cash and cash equivalents on the books. For the fourth quarter of fiscal year 2010, Days Sales Outstanding increased to 134 days from 125 days last quarter and Days Sales of Inventory increased to 115 days from 106 days last quarter mainly because we had a decrease in sales in the quarter.

Short-term bank loans and long-term bank loans totaled $179.3 million as compared to $180.2 million on June 30, 2010. Shareholders' equity totaled $156.6 million and China BAK generated $4.5 million from operating cash flow in the fourth quarter of fiscal year 2010. And the end of the quarter we had $62.5 million available for borrowing in our credit facilities.

In conclusion I would like to note that we are exploring, capitalizing on a bit of activities to generate this new revenue growth. We are seeking to increase market share in prismatic sales for OEM phone makers in China. We are -- our plans also to focus on high-power and polymer cells as there is strong growth in market demand for these products. In fiscal 2011 we will continue to enhance R&D of high-power lithium-phosphate cells for high-end market and increase the output of battery packs for OEM makers.

We believe the strong EV market trend, including the growing acceptance of lithium-ion applications, will favorably impact our EV businesses. We anticipate increased revenue contribution from our sales of lithium battery cells for EV, e-bike and UPS manufacturers.

Under the government-supported new energy development we have sent battery samples for light electric vehicles to customers and the manufacturing partners in the national 863 Program. We expect those initiatives will set a stage for our future growth.

As noted by Mr. Li earlier, in fiscal year 2011 we will continue to implement our turnaround strategy. In addition to our top-line growth focus we will also focus on cost control and to improve our profitability. Our plan is to employ very stringent financial budget policy and improve oversight accountability.

On the positive note last year also -- thank you for your participation on the call today. Mr. Li and I are happy to answer any questions that you may have. Operator?

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

Hi. Thanks for taking my question. First, Jun, noticed the press release with your departure. Can you provide some additional insight into your reasons for leaving?

Yes. Actually, I decided to resign from the Company for my personal reasons and in order to pursue interests, so there is no disagreement at this stage.

Okay. Thank you. And then, I guess looking back and particularly within the cylindrical business, I guess actually on a segment-by-segment basis is it possible to break down the revenue growth by pricing and volume to give us a feel for how much of the impact was pricing versus shipments?

Yes. In the prismatic segment you can see that we continued to enjoy growth quarter-over-quarter or year-over-year and we maintained a quite healthy gross margin at around 20%. And for our cylindrical business -- now actually if we just look at cylindrical cells for mobile computers then we do have a -- we do face in a very strong pricing competition and in the fourth quarter of the year I think we can barely achieve a breakeven at the gross margin level.

But the Company has made a lot of efforts to expand our cylindrical product into EV, light EV and UPS segments, which enjoy much stronger margins. And we have shipped battery samples to Taiwan Zero Moto and actually two Chinese Moto companies, so we do expect there will be some reasonable sort of orders from those auto manufacturers. And growth, therefore growth from the cylindrical line will come from those areas. And --

Okay. I guess when looking at cylindrical, was there volume growth year-over-year? It looks like the revenue was down almost 41% year-over-year for the --

Right.

-- fourth quarter. Was there -- was pricing down more than that?

Well, I would say the -- as we stated in our earnings release, we try to maintain our market share in the cylindrical batteries for notebook computers. And at this stage I do not see any sequential year-over-year growth in that segment alone.

Okay. So which -- okay. And what did you see from your view the overall market, how much did it increase during that same period?

Your, your -- well, I guess --

I guess my question is the attempt was to maintain market share, but it looks like based on my view the overall market has been growing, so it has been difficult even with these pricing concessions to even maintain that market share.

I believe when the Company, you talk about market share, we are really indicating to maintain a number of customers that we work with, and we supply to, and we do not want to lose any of them and the Company has successfully achieved that. And in the same time, as we mentioned, we are targeting additional application areas.

Now another area of growth may come from high-power batteries that are manufactured on Tianjin, which mainly use lithium-phosphate batteries. And in that segment you have probably seen that we announced several commercial contracts. One of the most notable is the contract with Chery and Chery also actually officially launched one of their EV in the Electrical Vehicle Show in Shenzhen, which is powered by our battery.

Okay. And I guess, looking ahead, how should we look at each of the segments from a growth expectation standpoint looking into 2011?

I guess the Company believes we can continue to enjoy growth in prismatic segment for cell phones and the Company is looking to break into new application areas for electronic vehicles or light electronic vehicles in our cylindrical product line. And the Company has been working with multiple auto manufacturers for almost over a year and we do expect some breakthrough in Tianjin's high-power product line.

Overall, would I guess from a revenue growth standpoint, what revenue growth are you expecting 2011 versus 2010?

At this stage, the Company is still evaluating its sales strategy and sales plan, so that's probably one of the reasons we are not in a position to give out 2011 guidance yet. Well, I am pretty sure that the Company's new management will be able to give you that guidance in a very short, prompt sort of timeframe.

Okay. I'll -- thanks again for taking my questions. I'll jump back in the queue.

Sure, no problem. Thank you.

Your next question is from the line of Doug Ruth with Lenox Financial Services.

Good morning. What kind of feedback are you receiving from Chery about the batteries?

Hi, morning. Actually, I -- what I have heard from our sales team and technical team is that the feedback are very positive. And so far it seems that we are the only supplied to Chery for their commercial models or their demo models in that Electrical Vehicle Show. Our Tianjin GM told us that in the battery supply meeting that happened in Chery earlier this month we are the only supplier there.

Okay. Was there a difference between the first order and the second order? Was there a difference in size or a difference in the batteries?

You are talking about first order and second order from Chery?

Yes. Because we were told this was a follow-up order that you announced recently.

Actually, the Company has announced only one commercial order from Chery and then the second announcement is about Chery I guess launched a commercial model using our batteries. We have of course an indication from our customer what kind of number of vehicles they are going to order from us, but we haven't seen any, next year of course, but I haven't seen any written order yet, so I probably cannot discuss this at this moment.

Okay. What kind of feedback have you been receiving for Geoby, the electric bike manufacturer?

What I heard is that if we can deliver to Geoby on time then there is a second order which could potentially be a larger order waiting for in the pipeline. So I probably guess from that it's a good sign.

Yes. And when is the -- when are you supposed to deliver these batteries?

It is going to be this year, fourth quarter.

Is the calendar 2010 or fiscal 2011?

Sorry. It's actually the calendar year, fourth quarter of calendar year, yes.

And what is happening with the electric buses? You had the order. Is there -- what kind of feedback? Will there be more orders do you think coming from that group?

I think we are shipping battery samples to more bus manufacturers and we are still waiting to see any sort of testing results from the real running of those buses.

So it is too soon to say what might happen.

Yes.

And what about the pricing of the lithium? Where is it at, and what is sort of the trend currently?

I think lithium pricing is quite stable and a variation might come from the other part of the components such as cobalt for cylindrical cells or ion phosphate, or the combination of lithium-ion phosphate.

Okay.

Yes.

Okay. Well, you did a lot for the Company in a short period of time and we are going to miss you and wish you the very best in the future.

Thank you so much. We are going to miss you and I guess we will probably -- our paths will cross in the future. I am sure about that.

Okay. Thank you.

Thanks.

(Operator Instructions). And there are no further questions.

Actually, Carmen, if there is no further questions then I would like to make one last announcement on behalf of myself and the Company. As Mr. Tobin from Roth Capital has already asked, the Company has made a disclosure and I would like to inform our investors that on September 30, 2010 I had formally notified the Company of my decision to resign from the Chief Financial Officer position for personal reasons.

And on November 29, 2010 the Board of Directors of our Company resolved to approve my resignation and also appointed Mr. Marcus Cui as the Company's Interim CFO. My resignation and Cui's appointment will be effective as of December 10, 2010.

I have enjoyed working with China BAK and it has been a rewarding experience, both professionally and personally. I wish success for China BAK in the future and that concludes China BAK Battery's fourth quarter 2010 and fiscal year 2010 earnings conference call. Thank you so much for joining with us today.

Thank you for participating in today's call. You may now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring the event.