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Cleantech Solutions International Inc. (NASDAQ:CLNT)

Q3 2012 Earnings Call

November 15, 2012 9:00 am ET

Executives

Crocker Coulson – Investor Relations

Adam Wasserman – Vice President-Financial Reporting

Operator

Good morning. My name is Kimberly and I will be your conference operator today. At this time, I would like welcome everyone to the Investor Relations Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions)

Thank you. Mr. Crocker Coulson, you may begin your conference.

Crocker Coulson

Thank you, Kimberly. Good morning, ladies and gentleman. Good evening to all of you who are joining us from Asia. I’d like to welcome all of you to Cleantech Solutions earnings conference call for the third quarter of 2012.

With me today on the call are Cleantech Solutions Vice President of Financial Reporting, Mr. Adam Wasserman; and we also have Vice President of Operations, Mr. Ryan Hua. Also joining us on the call is Jessie Zheng of CCG, who will provide translation for Mr. Hua.

At this time, I remind our listeners that on the call management’s prepared remarks due contain forward-looking statements which are subject to risks and uncertainties and management may make some additional forward-looking statements in response to your questions. Therefore, the company claims for protection of the Safe Harbor in these forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and therefore we’d like to refer you to a more detailed discussion of these risks and uncertainties contained in the company’s filings with the U.S. SEC particularly in the risk factors in our Form 10-K for the year ended December 31, 2011 and management’s MD&A in our Form 10-K for that same year, and in our Form 10-Q filed September 30, 2012.

In addition any projections provided as the Company’s future performance represent management’s estimates as of today November 15, 2012. Cleantech’s International assumes no obligation to update these projections in the future as market conditions change. At this point I would also like to state that Ernest Paul will be discussing non-GAAP financial measures adjusted EBITDA. We present these financial measures as a supplement to our GAAP results because we believe it provides useful information in analyzing and benchmarking the performance of our operations and assists investors in analyzing our year-over-year financial performance. We encourage you to visit our earnings press release for a complete reconciliation of adjusted EBITDA to net income.

With both formalities now out of the way it’s my pleasure to welcome Cleantech Solutions, VP of Financial Reporting, Mr. Adam Wasserman, who will deliver management’s prepared remarks consider covering operations and financial performance.

Adam over to you?

Adam Wasserman

Okay thank you Crocker. Good morning and thank you for joining us on our call today. We appreciate your continued interest and support in Cleantech Solutions. During the third of 2012 our sales improved 48.5% on a year-over-year basis and increased 35.2% compared to the second quarter of 2012. This progress was driven by a sharp rebound in sales for our dyeing machines along with solid demand for our forged products of non-wind industry customers. This quarter three performance illustrated the benefit of our strategy can serve multiple end markets, so that we can adjust our production mix to compensate for weaknesses in any one segment.

During the quarter we continue to experience soft demand for our forged products for the wind industry, which declined by 28.4% to $3.2 million or 18.5% of our total revenue. This is down from $4.5 million or 38.5% of revenues in quarter three of 2011. This market has become brutally competitive as wind power construction has lagged behind expected growth rates and turbine manufacturers pursue vertical integration and reduce their reliance on outside suppliers.

Some of the factors inhibiting growth of the industry include the tightening credit environment and the inadequate power grid to transmit wind energy to the areas of wind generation to the power consuming region of the country. In addition, the Chinese government cancelled in 2012 a number of preferential policies for forged rolled rings and related products for the wind industry such as subsidies and tax rebates.

We continue to believe that the foreseeable future wind components will at best maintain the current volume, because the wind industry is struggling with the absence of supporting policies and some of the wind customers are transitioning to other heavy industries. In addition, we have voluntarily stopped working with some of our wind customers with poor records of payment in the past. In the longer term, we expect growth opportunities if there are more supportive policy stand.

China currently has 62 gigawatts of wind power capacity and the government has set targets to reach 100 gigawatts by 2015 and 200 gigawatts by 2020. We hope that following the change in party leadership this fall, that we will see more clear policy direction to support these goals and build the robust power distribution infrastructure the industry will require. We have experienced strong demand for our forged product for non-wind customers where sales increased by 112.1% to $6.6 million or 38.2% of third quarter revenues. This compares to $3.1 million or 26.7% of sales in quarter three of 2011.

We were able to attract new customers and receive large orders from existing customers from the second quarter and we managed to recognize revenue in the third quarter when these orders were fulfilled. The primary driver for demand for these 91 customers is our application in heavy machinery and large scale valve.

In terms of solar industry we are encouraged by the recent initiative implemented by the Chinese government, which requires power plants of up to 6 megawatts be integrated into power grids free of charge and that the integration be completed within 45 days. This new policy provides subsidies for grid integrators on top of manufacturers, so that it helps connect the broken link that has led to the absence of transmission of solar energy to the end consumer.

On the other hand we have signed a Letter of Intent for an order of 45 to 50 units valued at over $2 million to a U.S. customer, which position us well for 2013. These units are mostly Sapphire Chambers to be used in smartphone and LED TV screens. In general we believe there are lot of more opportunities in domestic market and ensuring the solar industry will transition from export orientation to greater focus on domestic market.

During the first nine months of 2012, we had about $400,000 in sales of high performance pressure vessels used for production equipment for multi-crystalline and mono-crystalline silicon wafers used in solar manufacturing. In addition as of September 30, we had received about 1.65 million for additional orders from our international solar customer. And this inventory is now in Shanghai waiting approval for shipment, which we expect will occur before the end of the year.

We also saw very strong growth in demand for our dyeing and finishing equipment segment. Our revenues increased by 84.8% to $7.5 million or 43.3% of third quarter sales. This compares to $4.1 million or 34.8% of sales in quarter three of 2011. This growth has been fueled by our next-generation airflow-dyeing units, which replaces traditional water-based dyeing process.

The new technology is able to significantly reduce environmental impact of the dyeing industry save on raw material costs and also minimized wrinkling and damage to textiles. In Jiangsu Province, which is the center of the Chinese textile industry, the government is providing strong incentives for manufacturers to upgrade to the more environmentally friendly equipment.

As a result of these policies, we expect to see continued positive trends for this segment in the coming quarters. In October, we received two rounds of significant new orders for our airflow-dyeing machine. This included $2.2 million in orders for 23 units of airflow-dyeing machine followed by a $1.7 million order for 63 units.

We believe that the continued order flow in the case of positive recession for our equipment and while we expect to be a major upgrade cycle for the industry. In addition, we are investing in product development of a new after-treatment machinery, which is intended to replace similar products currently used by Chinese textile manufacturers, which are often imported from Germany and the U.S. We have entered into this space of market research and expect to rollout new machines in 2013, which we expect will be a strong growth driver for our business.

Now, I will discuss our financial results for the third quarter of 2012 in further detail. I would encourage you to refer to our Form 10-K filed with the SEC yesterday and our earnings press release issued hopefully yesterday. Our revenues for the third quarter of 2012 increased 48.5% to $17.3 million compared to a $11.7 million for the same period of 2011.

Our gross profit for the quarter decreased 64.2% to $4.3 million compared to $2.6 million for the same period in 2011. Gross margin improved to 24.9% during the third quarter of 2012 compared to 22.5% for the same period a year ago. The margin improvement was consistent with in both forged rolled rings and dyeing equipment as higher utilization levels resulted in improved operating efficiencies and leverage of our fixed costs including depreciation.

Operating expenses increased 11.6% to $1.1 million, compared to $1 million in the comparable period last year. The increase was primarily due to an increased depreciation, related to our ESR equipment which was not in used during the quarter partially compensated for by reduced bad debt expenses.

Selling, general and administrative expenses for the three months ended September 30, 2012 decreased 19% to $0.7 million, as compared to $0.9 million for the three months ended September 30, 2011.

Based on improving gross margin and expense discipline we were able to increase our operating income by 96.3% to $3.2 million, compared to $1.6 million for the same period of 2011. Operating margin was 18.5% compared to 14% in the third quarter of last year.

Other expense was $26,000 compared to other expense of $48,000 for the same period in 2011. The decrease was due to an increase in other income, offset by higher interest expense as a result of increase in debt and capital lease obligations.

Adjusted EBITDA, a non-GAAP measurement, which excludes interest, taxes, warrant modification expense, depreciation and amortization, was up 74.5% to $4.9 million, compared to $2.8 million in the same quarter of last year.

Net income was $2.4 million, or $0.88 diluted earnings per share, compared to $1.1 million, or $0.46 diluted earnings per share, in the third quarter of 2011. All share and per share information has been adjusted to reflect a one-for-ten reverse stock split effective March 6, 2012.

Now let’s turn to our balance sheet. As of September 30, 2012 we have cash and cash equivalent of $1 million, compared to $1.2 million at December 31, 2011. Accounts receivable were $10.5 million and total current assets were $19.6 million. We had $2.7 million in short-term bank loan payable and $0.2 million of current capital lease obligations and stockholders equity was $76.4 million. In the first nine months of 2012, we generated $5.8 million in cash flows from operation.

Capital expenditure in the first nine months was $6.3 million, for the balance of the year, we expect that most of our spending will be are entered towards solar product targeting smartphones and LED TVs and new after-treatment machinery. In conclusion, we had a very successful quarter, despite the significant challenges that are faced in both the wind industry and the solar industry and the near-term.

Growth of our forged products for non-wind applications has been very strong and we are tapping additional markets, including petroleum and petrochemical industries. We are also excited about the new opportunities presented in China’s solar industry, which is expected to undergo some major change following a recent announced government support policies, and we are entering the market for related equipment targeting smartphones and LED lighting.

In the dyeing and finishing equipment segment, we are benefiting from a major upgrade cycle, and we anticipate strong growth potential with the expected growth for our new after-treatment machinery next year. Thanks to improving a volume and expense controls, our margins improved in the third quarter. In the next few quarters, we continue to foresee a slight increase in our margins as we benefit from higher production volume and stable raw material prices.

We have been generating positive cash flow from operations, which we believe sufficient to enable, used to fund our new product development initiative internally. We know that has been a challenging period for investors in the China sector, the declining GDP growth, intensity and competition and rising cost have created challenges for many specialty manufacturing companies.

But we think that our multimarket strategy will provide us with the flexibility to adjust the changing market dynamics, and we have a committed and resourceful management team that know how to run a business profitably. We want to thank you all of our investors for your continued support.

With that, we will now open the call for questions and answers from the audience.

Question-and-Answer Session

Operator

(Operator Instructions) And there are no questions at this time.

Adam Wasserman

Okay. thank you, operator. Crocker, go ahead?

Crocker Coulson

Just saying, let’s ask one last time just to take people a little bit for Q&A.

Operator

(Operator Instructions)

Crocker Coulson

Okay, Operator.

Operator

And there are no questions.

Adam Wasserman

Hey thank you operator. On behalf of the entire China’s Cleantech Solutions International management team, we want to thank you for your interest and participation in this call. Also, if you have any interest in visiting our office and factory in China, please let us know. We look forward to speaking to you again on our next earnings conference call.

Operator

Thank you. That does conclude today’s investor relations conference call. You may now disconnect.

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