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Jinpan International Limited (NASDAQ:JST)

Q3 2012 Earnings Call

November 14, 2012 8:30 AM ET

Executives

Albert Sheng – VP & IR

Mark Du – CFO

Analysts

Mark Tobin – ROTH Capital Partners

Douglas Ruth - Lenox Financial Services

Operator

Welcome to the Jinpan International Incorporated third quarter 2012 earnings conference call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded. With us today is Mark Du, Jinpan’s Chief Financial Officer and Albert Sheng, Jinpan’s Vice President and Investor Relations.

This call may contain forward-looking statements made pursuant to the safe harbor provision for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations involve known and unknown risks, uncertainties and other factors not under the company’s control which may cause actual results, performance or achievements of the company to be materially different from their results. Performance or expectations implied by this forward-looking statement. All forward-looking statements are expressly qualified in their entirety by their cautionary statements, risk factor detailing the company’s filings with the SEC. Jinpan undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call.

At this point, I would like to introduce Mr. Albert Sheng. Please go ahead, sir.

Albert Sheng

Thank you operator and thank you everyone who joined today's conference call. I am going to review the third quarter operational results and update you on our business strategies. Afterwards I will turn the call over to Mark Du who will thoroughly review our financial results.

Our business in the third quarter was primarily impacted by less infrastructure spending China. Net sales for the third quarter were 58.8 million compared to 56.6 million in the same period last year. Net income for the third quarter was 3.9 million compared to 8.4 million in the same period last year. Net income decreased mainly due to lower gross margins on the sale of cast resin switchgears and certain types of VPI products which released in the market. We priced these products (inaudible).

In our international business, net sales outside of China for the third quarter were 7.2 million or 12.2% of net sales compared to 7.5 million or 11.3% of net sales for the same period last year. Revenue from international sales in the third quarter held up over the prior year period primarily due to purchase orders from more diversified customer base in the second half of 2012.

Looking at the first nine months of 2012, our topline revenue is in line with the prior year period. Our bond line is lower due to lower average selling price of our products. Despite the challenging economic bond in China, we managed to expand sales volume of our cast resin transformers by 3% in the first nine months of 2012 compared to the same period last year. We also successfully improved efficiency and reduced costs including a reduction in headcount within our administrative manufacturing departments.

We are also daily making headways in to diversifying the customer base for exports. In addition to the three OEM customers with whom we have supply transformers, this year we also received power orders from two more OEM customers. We look forward to working with these new customers to grow our international sales.

Going forward, diversification of our OEM customer base will also enable us to reduce the over dependence on single OEM customers for the majority of our estimate accounts.

In recent years, we have also been testing new revenue opportunities in our Switchgear product categories. Sales from gas insulate switchgears which we bought to market in 2011 continue to grow through the third quarter. Year-to-date we have received $2.3 million in orders for this niche product. As the JC brand gained more reorganization in this product category, we conquered sales, cast resin switchgears our products next year.

Jinpan currently operates three manufacturing facilities in China, in Haikou, Wuhan and Shanghai with a 3% increase in cast resin transformer sales volume over the prior year period. Our capacity utilization that remains at healthy levels. Our Guilin facility is on schedule to complete its first phase of construction by year end and commence reduction by the end of the first quarter of 2013. This new Guilin facility can lower our manufacturing costs and improve our competitive advantage for standard transformers

As this new facility gradually ramps up production, more capacity will come online throughout 2013 and give us the ability to bear the China’s market for standard cast resin transformers and capture more market share. The ratio of standard customized transformers was approximately 50-50 in the third quarter. Next year we set the ratio to increase slightly more in favor of standard transformers as we ramp up production in Guilin.

As of end of September, we had a backlog of approximately 104 million. We expect over 41% of this backlog to be shift by year end. In addition, we continue to receive orders in the fourth quarter that we expect to shift by year end. Valuing the current backlog further, as a percentage of total backlogs roughly 90% of this backlog was from domestic orders for the remaining 10% from international orders.

As we look at 2013, we believe that once that is transitioned at a national level, can result in greater government infrastructure spending and possibly a new found stimulus to increase the domestic Hainan, China which could lead to greater work flow for us in the second half of next year.

As market conditions improved, we believe that Jinpan’s current investments in this business will improve future revenue and profit growth. At this point, I would like to turn the call over to our CFO, Mark Du, who will present the details of our financial performance and stress our current financial progress.

Mark Du

Thank you Albert. I am going to describe our third quarter consolidated results and the outlook for full year 2012.

Net sales for the third quarter were $58.8 million, an 11.7% decrease from $66.6 million in the same period last year. The decrease in the sales was primarily the result of lower domestic sales compared to the prior year period. In the third quarter, domestic sales accounted for $51.6 million, or 87.8% of net sales, compared to $59.1 million, which also represented 88.7% of net sales in the same period last year. Net sales outside of China for the quarter were $7.2 million, or 12.2% of net sales compared to $7.5 million, or 11.3% of net sales for the same period last year.

The sales of cast resin transformers excluding those for wind power applications, switchgears and unit substations represented $55.2 million, or 93.9% of net sales in the third quarter, while wind energy products which include cast resin transformers and VPI products for wind power applications, represented $3.6 million, or 6.1% of net sales during the quarter.

Gross profit in the third quarter decreased 21.4% year over year to $19.6 million from $24.9 million in the same period last year. Third quarter 2012 gross profit margin was 33.3%, compared to 37.4% in the prior year period, and 30.8% in 2012 second quarter. Gross margin decreased in the third quarter mainly due to lower gross margin on recently introduced products.

Selling and administrative expenses in the third quarter were $14.8 million, or 25.2% of net sales, compared to $16.5 million, or 24.8% of net sales in the same period last year. Selling expenses decreased in the third quarter due to lower domestic product sales.

Operating income in the third quarter decreased 43.2% to $4.8 million, or 8.1% of net sales, from $8.4 million, or 12.7% of net sales, in the same period last year.

Net income for the third quarter decreased 53.7% to $3.9 million, or $0.23 per diluted share, from $8.4 million, or $0.51 per diluted share, in the same period last year. Third quarter net income as a percentage of net sales was 6.6% compared to 12.6% in the same period last year.

As of September 30, 2012, the company had $16.0 million in cash and cash equivalents, compared to $24million at December 31, 2011. The company’s accounts receivable on September 30, 2012 totaled $132.8 million, compared to $110.4 million at December 31, 2011. Notes payable in the 2012 third quarter decreased to $10.2 million compared to $13.6 million on December 31, 2011. Total short term bank loans outstanding at September 30, 2012 decreased to 15 million as compared to 21.4 million at December 31, 2011. And total long term bank loans increased to 18.9 million due to consumption of grading facilities.

As of September 30, 2012, the company had backlog of approximately $104 million, compared to 102 million as of December 31st, 2011. For the full year 2012, the company currently anticipates net sales of $208-$219 million, a decrease of 0% to 5% compared to 2011, net income of $13.2-$14.3 million, a decrease of 40% to 45% compared to 2011, and a gross profit margin of approximately 33% to 34% of net sales.

On that (inaudible) conference call. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll go first to Mark Tobin at ROTH Capital Partners.

Mark Tobin – ROTH Capital Partners

First could you give us the breakdown for the quarter for SG&A breaking and to selling G&A and R&D?

Albert Sheng

For the quarter, sale expenses is about 13%, 12% of sales and R&D which is including restructuring expenses, R&D for the quarter is 3 million.

Mark Tobin – ROTH Capital Partners

And it looks like based on your guidance that the real change is the increase in SG&A expense and operating expense. Can you give us some more color and I guess describe where those costs are incurring?

Albert Sheng

I think they are two factor one is also the gross margin. Gross margin impact is in the 1% impact in our guidance. G&A across the consortium for our nearly Guilin facility and of course we try to facilitate the cost found of our head counts but it’s going to tell a little bit longer time.

Mark Tobin – ROTH Capital Partners

And then looking at your sales, it looks like your international sales were quite a bit higher than your wind energy sales which is consistent with what you said about to selling to some of the other OEMs. Can you give us a sense of how those other OEMs and I guess apart from your one are traditional OEM, how the other OEMs are ramping up and what you’re seeing from an order standpoint?

Albert Sheng

Sure, like I have said in my comments, we especially the last two years to three OEM companies, so in the past most of our orders have been taken by largest OEM and other have best bit lower order volumes. This year we are seeing from other than our largest OEM customers, our other OEM customers giving us orders that that total amounts 7 million orders, so far this year. So basically the lower orders were wind sales from our large OEM customers being made up by more orders for customized orders from our other OEM customers. This year, in addition to the three that we supplied and commenced to last three years, this year we also received just from two other OEM customers. So what we are seeing is that as a wind business decline, (inaudible) reasons. That business being made up or picked up by sales to other OEM companies for a variety of different aspects.

Mark Tobin – ROTH Capital Partners

And then could you also give us an update on for your major traditional OEM customer, the status of the redesign for the wind products that you are working on?

Albert Sheng

Sure, investors at the last conference call, our customers introducing a new type of inter-buying and we have to design a new transformer to work with our customer’s new product and we have to rebuy that transformer. So that is on track by now. We believe that these products complete the (inaudible) process at the end of this.

Mark Tobin – ROTH Capital Partners

And then finally there was another large wind OEM that you had talked previously about qualifying with, what's the status of that process?

Albert Sheng

That is also on the testing with the pro type is on track, we complete by the end of this year, ’12. But right now what we don't have good visibility on the potential orders for our (inaudible). We all get more visibility on that from our OEM customers later on in the year.

Mark Du

Just for your information for less testing, we complete most of that, about 90% we pack. So this year we don't expect any more difficulties for us to testing. So we expect it shall be pass the test any time but it’s just that, we in part a lot has to do with government’s policy. So it’s just waiting for more clear features for this company.

Albert Sheng

Just to summarize what Mark said, and clarify what everyone in the conference call, we have one primary OEM customer right now to buy the bulk of our wind product and this OEM customer developing a new wind product and we have to develop a new transformer that works with that new wind product. So since second half of this year, we've been, our engineering team’s been working to qualify our transformer to work with a new product and that work is on track to be completed for the year. We also for the last couple of years have been working to qualify our transformers for another major OEM customers also specializing in wind, and that's a 90 more profit that we completed, most of the qualification for that OEM customer right now and we that too have to testing, apologize for them to this year as well. However right now we don't have good visibility on the wind business till next year just because there is a lot quality reasons, multi-headwinds in the entire year.

Mark Tobin – ROTH Capital Partners

That's helpful. And then finally, within the Chinese domestic market, you mentioned you had 3% volume growth. What's your view competitively? Are you at a point where you are given that growth that you are gaining market share in this challenging environment?

Albert Sheng

We believe we are gaining market share. In China, we saw the 3% growth in our cast resin transformers as 3% in the first nine months period of 2012. Both we still see a very challenging environment in China. In terms of product sales with the lower sales this year for our conventional switchgear products and some of our VPI products. So it’s a mix shift, we’re seeing probably more order volumes for our cast resin transformers with deluxe orders for our conventional switchgear and VPI products.

Operator

(Operator Instructions). We’ll go next to Douglas Ruth with Lenox Financial Services

Douglas Ruth - Lenox Financial Services

Was your New Jersey facility affected at all by hurricane Sandy?

Albert Sheng

Thank you for asking Doug. We didn’t lose power for I think the first week of hurricane Sandy but we ran on generator power for other than the day of the hurricane and probably two days after. The rest of the week we had generated up our facilities. So the impact is there limited. We did not have any damage to our building or to our grounding area. It is within our compounds.

Douglas Ruth - Lenox Financial Services

Okay, does hurricane Sandy, does that create an opportunity for Jinpan to sell more products in America?

Albert Sheng

Obviously the hurricane impact is in New York area and New Jersey areas are particularly hard. No one wants to profit from any type of disaster. But this event has first of all has created the level of awareness especially I mean a public sector, within government within forms of goods, power, infrastructure and it has created fortunately damage on transformer infrastructure in our area. So we are getting increase from contractors and also from our customers who have sold transformers to in this area before to come and help them assess some of the damage and we think that we will down the road supply transformers to companies.

Douglas Ruth - Lenox Financial Services

Okay, well we don't want to trade on anybody’s misery but we understand that there could be opportunities sometimes.

Albert Sheng

And especially if New York state and New Jersey decide to allocate more money to power infrastructure, I think Jinpan will stand to benefit because we have given certification for our transformer and really as we mentioned earlier, in this market, for UL cast resin transformers, just in impact ABDS.

Douglas Ruth - Lenox Financial Services

Okay, could you talk about the valuation of the stock statistically, we’re trading it less than half of tangible book value and we’re trading with forward pricing ratio of less than 6:1.

Mark Du

Yes of course we like this going into stock price right now because even our book value are more than entitled per share but I said also about (inaudible) around the area. So we were disappointed about the stock price but that's the market situation right now and all we probably tend to is we continue to work out to grow the company and to expend the market shares and increase our competitive and to remain the demand for the future growth.

Douglas Ruth - Lenox Financial Services

With this extreme valuation, tremendous value could be created for the shareholders, if the company were to buy backstock; simply buying back stock would add more value by an increase in book value than is being achieved through operations. Has management talked about considering a stock buyback?

Albert Sheng

Yes, both management and board has discussions on this matter and because the decision has not made at this point, with respect to various options, we are able to the company, so I don't want to talk too much about this right now because we’re still in the process of payment issues.

Mark Du

But once we have decision made, definitely we will allow this.

Albert Sheng

Yes, if we do decide to proceed with a stock buyback or other types of corporate actions that can improve value to our shareholders in the board meeting in terms of (inaudible).

Douglas Ruth - Lenox Financial Services

Would you think it might be reasonable to hear some kind of update by year end?

Albert Sheng

I am not the one making this decision, we have talked about, I will only tell you that our board and management has been discussing this issue for at least the past two months. So I don't want to, set deadlines for those but we do expect comp action, I will say or as soon as they make a decision, we will release the information.

Douglas Ruth - Lenox Financial Services

So another question for in that line is with the extreme valuation, have you been receiving inquiries about anybody interested in perhaps buying the company? Like perhaps ABB, it would seem like ABB might be?

Albert Sheng

Yes we have not received inquiries for this time.

Douglas Ruth - Lenox Financial Services

And with the addition of the Guilin facility coming online, do you think you would be a low cost producer of transformers in China?

Albert Sheng

With the Guilin facility, we will certainly solidify our position as the largest manufacturer of cast resin transformers in China. The Guilin facility is geared for efficient manufacturing standard transformers. So we believe that we’ll have a big cost advantage once that facility comes up and running particularly for Guangxi.

Douglas Ruth - Lenox Financial Services

In the PS Albert, you’ve given us utilization rates, are you able to provide what the utilization is of the different factories at this point?

Albert Sheng

Yes, one facility run about 90% of the utilization rate and Haikou about 80% and our Shanghai roughly around 70%.

Operator

(Operator Instructions). And at this time, we have no further questions; I would like to turn the conference back over to management for any closing remarks.

Albert Sheng

Thank you everyone for joining today's conference call. I know that our thoughts, that the price valuation has cost fair amount to investors. Our management team, we are experienced with recommendations from investors. We are looking at issues. But we have not made any decisions at this point with regarding our buyback or would be taking any other decisions yet. But if there is a decision made, we will promptly announce that to the investing community. Mark and I are always here and we’re happy to take your questions. So please don't hesitate to follow up with further questions. Thank you.

Operator

And that does conclude today's conference. Again thank you for your participation.

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