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Tri-Tech Holding, Inc. (NASDAQ:TRIT)

Q3 2012 Results Earnings Call

November 15, 2012 9:00 AM ET

Executives

Warren Zhao - Chairman and Joint CEO

Gavin Cheng - Joint Chief Executive Officer

Phil Fan - President

Peter Dong - Chief Financial Officer

Yan Liu - Assistant, Board of Directors

Analysts

Dmitriy Shapiro - Umbrella Research

Alec Eden - Analyst

Jeff Evan -Analyst

Mart Shea - Carolina Funds

Operator

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Tri-Tech Holding Third Fiscal Quarter 2012 Financial Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

I would now like to turn the conference over to Mr. Yan Liu. Please go ahead sir.

Yan Liu

Good morning ladies and gentlemen. This is Yan Liu, I am the Assistant to the Board of Directors of Tri-Tech Holding Inc. I would like to welcome all of you for being on the call today. In the business to announcing the financial results for the third fiscal quarter ended September 30, 2012. The Company's management will outline the forward-looking business plans in more detail. These discussions will include conservative forward-looking statements with regards to fiscal year 2012 and beyond. The executives on the call today are Chairman and Joint CEO, Warren Zhao; Joint CEO, Gavin Cheng; President, Phil Fan; and Chief Financial Officer, Peter Dong.

Before we move forward, I would like to briefly remind all of you of the Safe Harbor language as required while making the Company's disclaimer statement. This call may contain various forward-looking statements, within the meaning of section 27A of the Securities Act of 1933 and 12b of the Securities Exchange Act of 1934. We represent the company's expectations or beliefs concerning future events of the company's financial and operational performance.

These forward-looking statements are further quantified by important factors that would cause results to differ materially from those in the forward-looking statements. These factors include but are not limited to market conditions in China, India and other regions of the world. The financial and political environment of the water, waste water, flashflood control, industrial pollution control and safety activities in China, India and numerous other potential factors. Results actually achieved may differ materially from the expected results included in the following statements.

Also remember that we'll facilitate questions and answers at the end of managements prepared remarks and in order for all participants to be heard we ask for no more than two questions from each participants at a time during the Q&A session.

Now I'd like to turn the call over to the President Mr. Phil Fan to start with our review for the third fiscal quarter ended September 30, 2012.

Phil Fan

Thank you, Yan. Let me begin with a overview of the key financial figures for the third quarter and Mr. Gavin Cheng our Joint CEO, will then give you a summary of our growth strategies going forward and present outlook in the fourth quarter.

Our total revenue for the third quarter was $18.1 million a decrease of 24.4% over the same period in 2011. Revenues from Water, Wastewater and the Municipal Infrastructure decreased 58.6% to $6.4 million. Revenue from Water Resource Management Systems and Engineering Service increased 90.3% to $6.7 million; and Revenue from Industrial Pollution Control and Safety slightly increased 2.2% to $5.1 million from [$1.9 million] (sic- see press release) [$4.9 million] in the third quarter last year.

Gross profit for the third quarter was $4.7 million, a decrease of 23.3% over the same period in 2011. Gross margin was 25.7%, matching 25.3% in the same period of 2011.

Total operating expenses for the third quarter increased by 68% to $4.9 million, which includes $1 million for sales and marketing expenses an 98.6% increase over the same period last year. And $3.9 million of general administration expenses, a 63.3% increase during third quarter 2012. Substantial increase in operating expenses result in a loss from operations of $282,000 in the third quarter and seriously impacted our net income and earnings per share.

In the third quarter of 2012, our diluted net loss per share was $0.08, based on the net loss of $677,000, which was (inaudible) a decrease compared to the net income loss $1.9 million in the third quarter of 2011.

As of September 30, 2012, we had cash and cash equivalents of $13 million, excluding $3 million in restricted cash. We had aggregate lines of credit of $21 million and have raised $7.89 million through corporate bonds, underwritten by the Bank of Nanjing. The leverage of that is 50%. We received $3.9 million in orders from the build and transfer project in the third quarter 2012 and another RMB10 million in October 2012.

The (inaudible) in revenue and net loss in the (inaudible) due to the following mainly is; First, because of which -- we faced difficulties driving revenues in municipal water and the wastewater and industrial pollution control segment; Secondly, we experienced unanticipated customer-driven delays in evaluating project bids; Third, a delay of several large projects due to client reasons, (inaudible) revenue recognition during the third quarter; and most importantly we had substantial increases, mainly due to headcount, which increased by 59% to 474 people compared to 299 a year ago.

During the third quarter we continued to drive to diversify our customer base beyond government related (inaudible). This approach does not show immediate effect in our operations. That's because that we are confronting, are coming from two perspectives. One, the micro environmentally, certainly in economic slowdown the delay, the more we experienced fiscal expense issues and factors we're focused due in part to the central government conditions in China. Second, rising labor and raw material costs and a intensified market competition played more and the [medium] in Chinese in fact presented (inaudible) challenges to our growth.

Now I'll turn to our Joint CEO, Gavin Cheng, to give you more inside about the business. Gavin.

Gavin Cheng

Thank you. Once again I would like to thank everyone for being on the call. (inaudible) to wish you again. As of September 30, 2012, our total project backlog was $70.4 million, included $38.8 million in the Water and Wastewater Treatment segment, $7.9 million in the Water Resource Management segment and $23.7 million in the Industrial Pollution Control segment. The decrease on the backlog was majorly due to the decline in new contracts, we will award in third quarter, resulting from the market and the macroeconomic factors. But we anticipate a continuous flow in upcoming quarter.

We are currently expecting a total value of $139 million, potential contracts, include $86.7 million in the Water and the Wastewater Treatment segment, $5.2 million is in the Water Resource segment and the $47.1 million in Industrial Pollution Control and Safety segment.

Based on the performance in the third quarter of 2012 and the estimate projection for the coming quarter, we expect revenue for the fiscal year of 2012 to be around $80 million. Assuming the weighted average number of diluted shares remain about the same. We expect our earnings per share to be around $0.04 for the year of 2012. These are the Company's targets, not predictions of the actual performance. The foregoing statements regarding targets are forward-looking and actual results may differ materially.

We are going to complete the transfer of initial phase of further water treatment plant to the customer. The expansion phase of Ordos project will be expected to be completed and to pump water. We'll continue the construction of a waste water pipeline and treatment facility for India, Bihar wastewater project in Q4 and expect to receive the first payment. We're going to complete 90% of a huge industrial waste water treatment project.

Further a Mexico project, we expect to complete the fabrication and assembling of the evaporator unit. In spite of the gloomy quarter we experienced we are still confident with the increasing exclusion of our (inaudible) in the future to help our Company to get through the fiscal year and (inaudible). [Progress] these challenges and the improved profitability we are going to accumulate the project execution of several large contracts and the realized revenue in the fourth quarter.

Internally, we are attempting to cut our operations expense and consolidate certain departments and offices. (inaudible) by our broad capability we would like to have [PGC] contractor we'll continue bidding for BTO and BT opportunities, with favorable payment terms and we'll manage waste (inaudible) for municipal water, waste water treatment and the water supply, a tendency that has been [prevailing] in Chinese water market while continuing to expand our business in flash flood water and the river hydrologic monitoring in China, and upgrading water resource management programs, integrated with our technical [competence] on water resource information technology.

Water distribution management in irrigation, (inaudible) considered to be our future growth point. Supported by our R&D and Manufacturing center in Baoding we will develop our core technical competence on the more numbering technology for the irrigation the industrial resource, are very (inaudible) and the sea water desalination.

We are refining management practice to improve our foresight and the sensitivities in the industrial, (inaudible) we evaluate and integrate our scans to (inaudible) to adjust our strategic planning which will be in line with the market demand and the experience of the macro situation.

That concludes our prepared remarks. Operator, we will now open the call for the questions. Thank you, all.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Dmitriy Shapiro with Umbrella Research. Please go ahead.

Dmitriy Shapiro - Umbrella Research

Good morning, everyone. I have only one question, and it's a pretty simple one, you have now been a public company for several years and operationally you have demonstrated significant growth and profitability over the years. Being public has cost you millions of dollars collectively at this point. As a shareholder, are you satisfied with the performance of your stock and if not what do you intend to do about it?

Peter Dong

Dmitriy, I am sorry the line quality is not very good, can you repeat the second half of question?

Dmitriy Shapiro - Umbrella Research

Yes, I will. Second half was that you -- by now you have spent millions of dollars from being public first, and as a shareholder are you satisfied with the performance of your stock and if not, then what do you intend to do about it?

Peter Dong

Well, definitely we are not satisfied with that as any shareholder, and we are going to overall I think, it is a bad quarter and of course there are several reasons we just mentioned that have caused that. But as our CEO mentioned we, still working hard to find to refine and to adjust our business plan to make us turn around.

Dmitriy Shapiro - Umbrella Research

All right, but have you considered, doing something to specifically, until this quarter your numbers have been pretty good and the growth have been pretty consistent, so have you considered in your specific investor how these shares are maybe sponsoring analyst days or something like that to bring the investors' attention back into the name?

Peter Dong

Well, yes, we do want to do that. But first I think it is important things right now we have to focus on our financial performance, especially to increase the revenue and the expenses. That's I think that's the major focus for now to make the earning healthy. Hello.

Dmitriy Shapiro - Umbrella Research

Yes, thank you.

Operator

(Operator Instructions) Our next question comes from the line of [Alec Eden] a private investor. Please go ahead.

Alec Eden - Analyst

Thank you for taking my call. On August 14, you issued a press release reaffirming 2012 guidance of revenues between $103 million and $128 million and earnings per share between $1.18 and $1.47. And then about a month later September '12 you were at investor conference in London, and your chart showed the same thing. So my question is, is there not that much visibility in this business that you can't see that far out, I know that your business was deteriorating?

Peter Dong

Well, March, [target] we pursued in the first half of the year, and we end up (inaudible) because of the build-transfer type of business and also a lot of finance we need to put in the money there so we didn't anticipated some of the slowdown, as we're turning down. The other reason we push is the on beginning of the year, for the Indian project it's although we have a lot of uncertainty, we cannot started and we anticipated we'll start in April, then Indian Federal Government is reviewing our, project office, registration [things], that takes much longer than we expected.

So I guess that's a major, two -- several major projects delay and several major [business] we lost because of the sudden casualties for us, that's all I can answer the question like that.

Alec Eden - Analyst

Okay. Are you saying then that the Indian business revenues, the $20 million shortfall that you're projecting for 2012, that will be pushed in the 2013?

Peter Dong

Right. Because during this quarter we anticipated more revenues form there but we only as of, let's say we've got the permits to go ahead during the middle of august, so we really don't have much time to executing the Indian jobs, so we only have 5% of the revenue recognized during this quarter.

Alec Eden - Analyst

Okay. Thank you.

Peter Dong

Operator

(Operator Instructions) Our next question comes from the line of [Jeff Evan] a private investor. Please go ahead.

Jeff Evan - Analyst

Yeah, can you comment on your outlook going forward in terms of your sales staff and number of heads going forward and how you're going to get your sales staff to be more proportionate with your current revenues and revenue outlook?

Peter Dong

Okay. Well that's in earlier of this year, than later last year we didn't anticipate (inaudible) the situation in [steady graph] in the headcount [increased] for the sales and marketing and (inaudible) project (inaudible) to reduce that and still have some of the decision pretty soon to reduce cost and expenses, we have opted the Chinese leadership system, we hope and we expect the situation will be better next year. We tried to match our personnel and our revenue for next year's.

Jeff Evan - Analyst

Okay. Yes, it just seems like there's been explosive growth in the number of sales and marketing personnel, and that hasn't been commensurate with the revenues, well you know. You need sales and marketing people to grow the business, you've also got to keeping that line with the revenue base, otherwise you get in a situation like we've seen.

Peter Dong

Right. There are a lot of project in our visibility but just that it's the second half the lot of things are getting delayed it's our certain if they may not (inaudible) especially the governments and the local government we kind of face their budgeting and spending. There are other political reasons or some other reasons they tend to slow down so always see that. So it's really -- we didn't utilize -- materialize the project (inaudible).

We are not going to cut very much on the sales and marketing, probably going to cut some of the administration sectors over -- consolidate some of the sales office.

Jeff Evan - Analyst

Okay. Thank you.

Peter Dong

Thank you.

Operator

Our next question comes from the line of [Mart Shea with Carolina Funds]. Please go ahead.

Mart Shea - Carolina Funds

What are your revised earnings estimates that can be believable this time?

Peter Dong

Well the revised one, pretty much this -- by the time of this year, we've pretty much no -- most of the existing projects that the situation [pegs] and we estimate some of the major projects that have come up with these numbers, that's the best we can -- based on our judgment and our estimation.

Mart Shea - Carolina Funds

I didn't understand what the -- what is the numbers that you put out, $1.18 low, up until a couple of months ago, what are you seeing now?

Peter Dong

A couple of months ago we like I just answered the previous question, there several months ago we anticipated growth -- the major projects are going to go in as we planned but months ago we don't see that kind of situation pace. So now we adjusted the guidance based on the current execution schedule on the existing (inaudible).

Mart Shea - Carolina Funds

To what?

Peter Dong

To realize the revenue by end of the year.

Mart Shea - Carolina Funds

Why doesn't Mr. Fan take any phone calls from investors?

Peter Dong

Can you identify your name again pleaes?

Mart Shea - Carolina Funds

[Mark Shea], called Mr. Fan maybe 2 to three times.

Peter Dong

I believed you talked to (inaudible) about the efficiency before -- I remember you mentioned asking the same question last time.

Mart Shea - Carolina Funds

Yeah, well he's still not answering the phone calls. Are you guys, I believe, you people are either deceiving us or are incompetent in my opinion, so I don't have --

Peter Dong

You can him question right now.

Mart Shea - Carolina Funds

Not any more.

Peter Dong

If you have any question you can ask him right now?

Mart Shea - Carolina Funds

No I'm just a another investor who has been deceived by incompetence. I'm done.

Operator

(Operator Instructions) Our next question is from the line of [Jeff Huppon], a private investor. Please go ahead.

Jeff Huppon - Analyst

Yeah, again on the revenue outlook for the calendar year and EPS going forward, what degree confidence you have and you're going to be able to deliver those numbers. In the last quarter, and there's been a major deterioration in your outlook in the last three months, so what degree of confidence do we have and revenue, full year revenue and full year earnings per share numbers that you've now projected.

Peter Dong

As I just mentioned, this number is (inaudible) current at project under execution and we anticipated we can recognize the revenue from existing projects, not including any new projects.

Jeff Huppon - Analyst

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of [Alec Eden] a private investor. Please go ahead.

Alec Eden - Analyst

Yes, wanted to ask a question about, you talked about municipal governments freezing projects toward the end of the year, the uncertainty and the transition in political leadership in China, is the problem with not winning any contracts, we haven't seen but just one or two in the past, six months or so, is the problem with lack of sales due to those factors or is it, you're just too small a company to bid effectively on some of the contracts in your pipeline?

Peter Dong

That's probably one of the reason, because of the government spending reduced, a lot of the project that we have the development -- the different payment terms and financial structures from there. So we are not big enough or financially strong to take that kind of build-and-transfer project which is a the contract or (inaudible) currently have to finance their construction. As we bid previously for all those projects but we're not capable to bid on that kind of projects.

Alec Eden - Analyst

Okay. Is it -- have you given any consideration to partnering with a larger firm, perhaps in a complementary arrangement with, where they would take on the bigger pieces and the financing and you would just do the technical side of the project?

Peter Dong

Yes, that's a possibility to actually that we exploring that possibility right now with some of the government or company in China. So at this time we just started, we haven't materialized any project yet.

Alec Eden - Analyst

Okay. Thank you.

Peter Dong

Operator

(Operator Instructions) Management I show there are now further questions at this time. Please continue with any closing remarks.

Warren Zhao

Thank you, Operator. There will be no further comments or remarks from us. We'd like to thank you very much, thank you everyone for being on the call today. Phil, do you have anything to say.

Phil Fan

I will come back to the (inaudible) number.

Warren Zhao

Okay. That will be all operator, thank you very much.

Operator

Ladies and Gentlemen this concludes the Tri-Tech Holding's third fiscal quarter 2012 financial results conference call. Thank you for participation you may now disconnect.

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