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China Fire & Security Group, Inc. (NASDAQ:CFSG)

Q4 2008 Earnings Call

March 12, 2009 8:00 am ET

Executives

Michael Tieu – ICR, Inc.

Brian Lin – Chief Executive Officer

Robert Yuan – Principal Accounting Officer

Analysts

Chenyi Lu – Brean Murray, Carret & Co.

Alexander Potter – Piper Jaffray

Adele Mao – Susquehanna International Group

Tim Hanson – The Motley Fool

Yan Cheung – Roth Capital Partners

Vincent Wong – Private Investor

Operator

Good day you have been joined to your conference. As a reminder all parties are in a listen-only mode and today's call is being recorded. At this time I would like to introduce Mr. Michael Tieu of ICR for opening remarks and introduction. Please go ahead.

Michael Tieu

Thank you everyone for joining us for the China Fire & Security Group's fourth quarter 2008 earnings call. With us today is Brian Lin, China Fire's Chief Executive Officer and Robert Yuan, China Fire's Principal Accounting Officer. Before we get started I am going to review the Safe Harbor statement regarding today's conference call. This conference call may contain in addition to historical information, forward-looking statements within the meaning of the Federal Securities Laws regarding China Fire. Forward-looking statements including statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, other than statements that are historical in nature.

These forward-looking statements are based on current management's expectations and are subject to risks and uncertainties that may result in expectations not being realized, and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements. Potential risks and uncertainties includes product and service demand acceptance, changes in technology or economic conditions, the impact of competition and pricing, the impact of government regulations, and other risks contained in the statements filed from time-to-time with the SEC.

All such forward-looking statements, whether written or oral, and whether made by or on behalf of the company, are expressively qualified by the cautionary statements. Because forward-looking statements are subject to risks and uncertainties, we caution you not to place undue reliance on these statements. Forward-looking statements made during this conference call only represent management's estimates as of today, March 12, 2009. China Fire & Security Group assumes no obligation to update these projections in the future as market conditions change. For those of you unable to listen to this entire call at this time, a recording will be available via webcast for 360 days on our corporate website, www.chinafiresecurity.com.

At this point, I would like to introduce Brian Lin, Chief Executive Officer of China Fire & Security Group. Brian?

Brian Lin

Thank you very much, Michael. Good morning everyone to those in the U.S. and good evening to those participants in Asia. Welcome to our fourth quarter 2008 conference call. Today, we will discuss our financial results, talk about our recent developments and our strategic plans and conclude with our guidance for full year 2009.

Despite a challenging global macroeconomic environment, we are very pleased with our fourth quarter and full year 2008 results. We continue to grow our business and our brands successfully and we have further strengthened our position as the leading provider of industrial fire protection solutions in China. Before we get to the details of our full year and fourth quarter 2008 financial results. I’d like to share with you highlights of many achievements during the year, as we continue to reach new records in our business.

We achieved record revenue of $61 million, an increase of $22.3 million or 47.8% over the previous year. We also had record net income of $24.7 million, a year-over-year increase of 47%. We ended the year with a record strong backlog of $72 million, as compared to $62 million at the end of 2007. During the year, we also had major contract wins in iron and steel including Jiuquan Iron & Steel Group, Wuhan Iron and Steel Group, Anshan Iron & Steel Group and Echeng Iron & Steel. We also won major contracts in petrochem, nuclear, and transportation including five regional power plants of DaTang in China Nuclear Power Engineering.

As you can see from our many highlights 2008 was another successful year for China Fire and I’m especially pleased that the momentum remains gripped, as our rate of contract wins and new contract bids since our return from the Chinese New Year holidays in February continues to be strong, boosted by a combination of China's stimulus plan consolidation of the iron and steel industry and a continued build-out of nuclear generators, power generators, oil refineries and railway systems, we are seeing strong demand for our fire protection systems.

We are also excited about our international expansion opportunities and such even with a challenging global macroeconomic environment is the backdrop, I am proud of our many achievements in 2008. And I’m excited about 2009, which I will discuss in more detail later in this conference call. At this point however let me turn the call over to Robert for a detailed discussion on our fourth quarter and full year financial results. Afterwards, I’ll return to discuss our recent developments and our strategic plans. And conclude with our guidance for full year 2009. Robert?

Robert Yuan

Thank you, Brian. I am very pleased that China Fire has to-date (Audio Disturbance) as many companies servicing around the world and has once again accomplished solid quarterly and annual financial performance. Our revenue for the full year 2008 grew 47.8% to a record $69.1 million, up from $46.8 million in 2007, driven by our strong growth in system contracting projects.

During 2008, we completed 360 total solution and product sales contracts compared to 274 contracts in the previous year. The iron and steel industry is still our largest sector and contributed 81% of our revenues. Followed by power generation at 9% and the petrochemical at 4%. During 2008, Capital Iron and Steel was our largest customer contributing $17.6 million or 30.8% of total revenue as we continued to fulfill our $31 million contract that is expected to complete in 2009.

Our gross margin for 2008 was a strong 67.2% or 230 basis points higher than our 2007 gross margin of 54.9% increasing our gross margin benefited from a higher percentage use of our proprietary products to fulfill contracts, which contributed higher gross margin than third-party products. This increase was also attributable to a higher selling price of some of our proprietary products in 2008. While we are delighted by the strong gross margin achieved in 2008, we continue to reiterate our long-term view that our gross margin will range between 45% to 55% as we plan to further expand into other verticals and markets, which may require more use of third-party products our initial price incentives.

Driven by the strong revenue growth and gross margin expansion our operating income grew 58.3% to $23.6 million in 2008 as compared to $40.9 million in 2007. Correspondingly, our 2008 operating margin expanded to 34.1% or 230 basis points higher than our 2007 operating margins of 31.8%. During the year, our operating expenses totaled $15.9 million in 2008, compared to $10.8 million in 2007 as we continue to invest in sales and development. As some of you may remember, China Fire was a key participant in the Twelfth International Fire Protection Equipment, Technology Conference & Exposition in Beijing and also held a technical seminar on technology, innovation and intellectual property protection.

This marketing program further elevated our industry-leading brand among our peers, customers and regulators. We also invest in adequately into our research and developments. We continue to build a strong pipeline of practical as well as a patentable innovation. On the other hand we managed our general overhead expenses with sound discipline as our G&A expenses increased a moderate 18.0% year-over-year rate, which is less than half of revenue growth rate. As a result our GAAP net income grew by $7.9 million or 47% to $24.7 million in year 2008 versus 16.8 million in year 2007.

Similarly, our fully diluted GAAP EPS grew 44.6% to $0.88, compared to $0.61 in the previous year. Continuing the trend from each of our previous three quarters of the year, our revenue for the fourth quarter of 2008 grew 48.7% to $21.0 million, compared to $14.1 million for the third quarter of 2007. We continue to benefit from our strong pipeline of new total solution products as well as interrupted completion of milestone on our large projects such as Shougang Jingtang and Xinyu during the fourth quarter. We generated revenue from 214 total solutions, product sales and maintenance contracts.

Total solution revenue increased 41.8% to $16.0 million versus $11.3 million in the fourth quarter of 2007 generated from the 115 total solution contracts. Our product sales grew 142.5% year-over-year to $4.3 million driven by higher focus on the fulfillment business activities. Maintenance service revenue decreased $371,000 to $664,000 due to the timing of maintenance contract renewal. As we continue to fulfill large contracts with our core customers, the iron and steel industry remain the largest vertical contributing approximately 82% of total fourth quarter revenue.

Power generation and petrochemical contributed approximately 4% and 10% respectively other verticals contributed approximately 4% of our revenue during the quarter. Our fourth quarter gross margin improved 110 basis points year-over-year to 54.3%, which although remained at the high-end of our target range, declined sequentially from the particularly high third quarter gross margin of 58.9%. Our operating income for the fourth quarter grew 55.2% to $6.2 million from $4.0 million for the same period of last year. Our operating margins expanded year-over-year to 29.5% from 28.3% even as our operating expenses increased 49.7% year-over-year to $5.2 million. This increase was mainly attributable to higher sales activities as well as higher general administrative expenses due to increase in our patent and year-end incentives.

As a percentage of revenue, our SG&A improved by 7 basis points to 21.4% versus 22.1% in the same period of last year. Our R&D expenses were $446,000 as compared to $215,000 in the same period 2007, as we continue to innovate and develop further improvements to our LHD, Water Mist System, and software for all the detections and control systems. Our total other income was $632,000 for the fourth quarter of 2008, compared to $54,000 for the same period 2007, as we earned higher other income from higher VAT, value-added tax rebates and higher interest income.

Due to the income tax recovery from one of our subsidiaries, Tianxiao Fire Safety Equipment, our provision for income tax was a negative $6,000 U.S. in the fourth quarter of 2008, compared to a 5,000 provision for the income tax for the same period of last year. Beginning in 2009, we anticipate that China Fire will be subject to an effective tax rate of approximately 13%. Our GAAP net income for the fourth quarter of 2008 grew 69.2% to 6.8 million as compared to 4.0 million for the same period 2007, driven by the growth in our top line and expansion in our operating margins. As a result, our fully diluted GAAP EPS grew more than 70% to $0.24 from $0.14 a year-ago. At end of the fourth quarter our total backlog were $72 million up from $62 million at the end of 2007.

As previously discussed we believe our strong backlog provides us with excellent revenue visibility over the next 12 months and therefore provide us with additional comfort in our business projections in the current challenging environment. Now, I would like to turn your attention to our balance sheet and cash flows. Because the balance sheet is a snapshot at the moment in time, I would like to address specifically only line items that we have significant change or that I believe can have material impact to our ongoing operations.

As of December 31, 2008, we have cash and cash equivalents of 23.7 million a sequential increase of 4.9 million as we continue to generate positive cash flow from operations. During the quarter, we generate 6 million cash from operations driven by our strong net income and our continued focus on receivables and inventory management. Our net receivables totaled $25.8 million, up sequentially from 19.2 million.

However, our days' sales outstanding or DSOs were 113 days for the fourth quarter of 2008, an improvement from 117 days last quarter benefiting from our improved year-end cash collection objectives. Our inventory was $6.5 million, a decrease of 1.2 million from $7.8 million at end of September, accordingly our working capital increased by approximately $6 million to $55 million up from $59 million at end of the third quarter. We currently have no bank loans or long-term debt and such that our total shareholder equity improved sequentially by $7.0 million to $78.7 million at the end of December 2008.

In summary, I am very proud of our strong financial performance in the fourth quarter and our constant consistent growth and profitability throughout the year. Despite the reported reduction in the global steel and our solid business model on tier 1 Chinese customers have combined to provide us with sustainable drivers to support our continued growth and profitability. Moreover, our strong balance sheet with growing cash and no debt combined with solid cash flow from operations will fall out to a strong addition to further expand our industry leadership, increase our market share and explore other strategic opportunities. Now, I would like to turn the call back to Brian for a discussion of our recent developments and our strategic plans. Brian, please.

Brian Lin

Thank you, Robert. Let me now share with you of our growth strategies and the specific macroeconomic trend that continue to validate our aim. Firstly, we will continue to focus on our core Tier 1 customers in China's iron and steel industry as we aim to further extend our leading position and market share. As you may know, our fire protection systems are installed in 70% of the largest new systems in China's steel industry and our current customers include the largest steel producers.

Despite general concerns of challenging times for the iron and steel industry, we are actually witnessing strong demand for our total solutions in this vertical as some of our Tier 1 customers are receiving more government subsidized funding pick-up in demand from the end of last year and extra government support for consolidation. According to the Minister of PRC, Ministry of Industry and Information Technology. The Ministry will spend 15 billion RMB or approximately $2.2 billion to subsidize loan interest for technology upgrade and reform project in the iron and steel industry.

Similarly, China State Council is expected to release the China iron and steel industry's revitalization scheme, which will provide financial subsidies and loan discounts to leading iron and steel companies. Furthermore, approximately, half of the government's before trading RMB or approximately U.S. dollar, $585 billion stimulus plans will be allocated for investments into steel consuming infrastructure construction projects and it is expected that a stimulus plan will drive demand for additional 100 million metric tons of steel.

Moreover, according to the China Iron and Steel Association, China is preparing a three-year plan to consolidate its steel industry, engineering the rise of three major steel groups. Shanghai based Baosteel Group, Wuhan Iron & Steel Group and the combined group led by Anshan Iron & Steel Group and Benxi Iron & Steel Group will be the consolidation.

The three will emerge as China's steel giants, each with having a capacity of over 50 million metric tons by 2011. We are happy to report that all three are with 16 customers, as the government wants to foster several globally competitive large scale steel groups the top five steel groups will likely account for 45% of the country's total capacity. We believe that as the industry consolidates, the large producers will continue to operate their production facilities to modern standards, which creates additional demand for our solutions. It is well known that our fire protection systems can truly be sure that our customer's production facilities are fully compliant with China's new mandatory fire codes and therefore we believe that they are inexpensible for new or recently upgraded iron and steel production facilities. As such contrary to general perceptions regarding the iron and steel industries in China, we are very excited about our revenue opportunities in this core vertical.

Secondly, we will further expand into other complementary verticals by leveraging our leading brand and total solution offerings. We are very pleased with our momentum in the power generation vertical as we won contracts totaling 13.4 million in 2008 versus 4.4 million in 2007. According to the China Electricity Council, China will invest $44 billion on new power generation capacity this year. We are also very pleased that the nuclear sector has already become our new large vertical in 2008 as we won a total of $12.9 million in new contracts that's compared to less than $1 million in 2007.

China plans to invest 450 billion RMB or approximately $66 billion on nuclear power development by 2020 and we are already seeing direct benefits last year shortly after announcement of the stimulus plan, three large nuclear power projects costing RMB 120 billion or approximately $18 billion U.S. dollars received the go ahead to start construction. We are also set right with our further penetration in the petrochemical verticals as we grew contract wins at 56% to $6.5 million in 2008. As part of a petrochemical stimulus package recently approved by the State Council, China plans to build new refineries with total crude processing capacity of 2.19 million barrels a day and establish an oil product reserve system that could seat overall reserve volume of 10 million tons within three years.

Furthermore, the National Energy Administration, the three-year energy blueprint includes building three refinery bases in the eastern cities of Shanghai, Ningbo and Nanjing, each with annual crude processing capacity of 30 million tons or close to 602,500 barrels per day. In addition, the plan proposes, six-refinery bases in the southern cities of Maoming, Guangzhou, Huizhou, and Quanzhou and northern cities of Tianjin and Caofeidian, each with an annual capacity of 20 million tons or around 400,000 barrels per day. We are very excited about our revenue opportunities in the transportation vertical as well. It is estimated that over 700 billion will be invested in transportation over the next five years, with $300 billion in railway over the next two years and $15 billion annually for subways.

The Chinese government will speed up the construction of new rail lines including high-speed lines linking major cities. There will be a wide spread plan for extending the total length of China's railways to 120,000 kilometers by 2020 up 50% from the total length at the end of 2008. We believe that most of the infrastructuring investments mentioned above will directly benefit China Fire as they all require fire protection products and services. As such we will continue to strengthen our integrated product sales as well as total solutions to cater to these industries.

Thirdly, we will continue to invest in technology innovations and influence the development of new fire standards and CO enhancements. Currently, we own 76 patents and have 37 patents pending in China and internationally. We believe these patented proprietary products will strongly support our future business growth in China and enhance our ability to maintain healthy margins. Furthermore, we are highly optimistic about several new innovative products in our product pipeline that we believe can be significant contributors to our future growth.

Moreover, our officers are on a number of drafting committees on industry standards Design of Fire Safety Standards for Metallurgy, Iron and Steel Enterprises and Standardization for Fire Safety Designs in Thermal Power Generating Plants and Transformer Stations. We continue to actively advice regulatory bodies in China and we believe that our close participation in the development of new standards and CO enhancements continue to elevate our brand enhances our competitive strength position.

Specifically, we intend to say that this May, China will issue a major amendment to the national fire code. Despite at all, we stipulate higher requirements for fire safety products, require all fire safety products to fully comply with current national standards and discarding dated product. The new fire law will also impose stricter control over industrial facilities, while assigning penalty and liability to the facilities owners in the event of fire hazards. We believe this will drive higher demand for fire safety products and services in general and more correspondingly higher demand for our industrial leading solutions.

Fourthly, we will actively pursue fire protection projects and products sales in international market. I’m pleased to report two new contracts wins in international market totalling more than $3 million. The first is a $2.1 million contract win in India, where China Fire will serve as a total fire protection solution provider for BALCO captive power plant. China Fire will be responsible for implementing the entire fire protection system for the project including engineering, procurement, construction, monitoring, technical guidance, and maintenance. The project expected to be fulfilled is the next 18 months.

The second is $1.1 million contract win in Indonesia. China Fire will serve a fire safety product provider for the PLTU number 3 Paiton power station project apart from being power safety products provider, China Fire will also provide design, engineering, monitoring and technical guidance for the project. Under the contract China Fire will provide both extinguishing and detection products. The project is expected to be fulfilled in the next 12 months.

Fifthly, we will continue to proactively explore strategic merger and acquisition targets strictly speaking we expect all our M&A transactions will be accretive to our earnings and complementary to our core fire protection business. We believe that our strong balance sheet enables us to target good companies that have strong market presence in certain industrial verticals or have strong marketing channels or companies with recurring maintenance services revenue. We intend to leverage our brand, our technical expertise and our broad distribution to drive synergistic revenue opportunities.

Finally, while we are focused on executing our growth strategies, we are also optimizing our balance sheet and maximizing cash flows. We have adopted tighter credit controls, implementing more proactive receivable collection policies and in force stricter accounts payable procedures. We are also reviewing and improving our internal controls, talent management and financial planning system. While we are mindful of the difficult environment, we are comfortable with our business visibility based on our strong backlog and above mentioned strong growth drivers.

For the full year 2009, the company anticipates revenue will grow between 28% to 38% to a range of $88 million to $95 million. Pre-tax income is expected to grow between 22% to 32% to a range of $30.2 million to $32.6 million. Assuming an effective tax rate of 13%, net income is estimated to grow between 7% to 15% to a range of $26.3 million to $28.4 million, or $0.93 to $1.00 per diluted share, based on 28.3 million shares outstanding. Please note that our effective tax rate in 2008 was 0.2%.

In closing, we continue to work diligently to optimize shareholder value by focusing on growing our business strategically and profit-fully by capitalizing on great opportunities and by expanding our technical and market leadership. We continue to be excited with our growth prospects in our core iron and steel market and customer base. We also are very excited with our success in energy, petrochemical, and transportation verticals as well as our new contract wins in the international market. Lastly, we are pleased with our strong balance sheet and cash flow and believe we are in an excellent position to capture new strategic opportunities. This concludes my prepared remarks for the fourth quarter 2008 and full year 2008. Operator, we will now open the call up for questions. Go ahead.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). The first question comes from the Chenyi Lu of Brean Murray, Carret. Please go ahead.

Chenyi Lu – Brean Murray, Carret & Co.

Thank you Brian and Robert. Very good quarter. I have two questions. The first question I’d like to ask is do you see any contract delay given the current weak economy in China?

Brian Lin

You mean the contract execution.

Chenyi Lu – Brean Murray, Carret & Co.

Yeah. In terms of any project deployment delay as to, some of your customer may say you know, what – why not just postpone the project right now do you see any activity related with that?

Brian Lin

These varies in these large customers, I think – at the end largely there might be some delay, but its being picked up since the beginning of this year with a stimulus plan with overall government support for these companies, we are only addressing and serving large customers. So, overall we are seeing business as usual.

Chenyi Lu – Brean Murray, Carret & Co.

Okay, great. So, what I mean, because you still comp with our consensus number. So, even it's more delayed in the last quarter, so its still mean a number, but as of now you have not seen any delay right?

Brian Lin

Yes.

Chenyi Lu – Brean Murray, Carret & Co.

Okay. Let's move on to my second question can you discuss about the current contract activities in iron and steel industry and then can you also talk about what you see in terms of contract synergy going forward into 2009 related to the iron and steel industry? Thank you.

Brian Lin

As I stated in my prepared remarks in the iron and steel industry overall is not as good as large shares, but with the Chinese stimulus plan with the government revitalization scheme for iron and steel industry, the top tier customers are still growing strong with a mandate that by 2012 there will be three largest steel giants in China each with capacity of over 15 million metric tons of capacity. So, that's just gets unpulled for the consolidation. So, we still see lot of projects potentials for us in 2009, and our sales are actively following all these potential projects right now.

Chenyi Lu – Brean Murray, Carret & Co.

So, at this moment you probably still expect that contract activity are going to be up year-over-year in 2009 for iron and steel industry right?

Brian Lin

Yes. We still see that, there is two aspects, one is the contract signing, and other one is the revenue recognition. From revenue recognition wise, we still have a lot of backlog it's from 2008 carried over to 2009, which will be recognized in 2009. So, those will certainly be a major source of revenues for 2009 and in the meantime we will continue to expect more projects signings in 2009.

Chenyi Lu – Brean Murray, Carret & Co.

Okay great. Thank you. That's all my questions.

Brian Lin

Thank you.

Operator

The next question comes from Alex Potter of Piper Jaffray. Please go ahead.

Alexander Potter – Piper Jaffray

Hi guys. Thanks a lot for taking my questions. Congratulations on the quarter.

Brian Lin

Hi.

Alexander Potter – Piper Jaffray

First of all I guess just as a kind of follow-up and clarification to that last question. I guess not just with regard to the iron and steel industry, but just as a whole for your company, do you expect to see, am I hearing this correctly that you expect to see more and new order activity in 2009 exclusive of the backlog such as new order signing in 2009 as compared to 2008.

Brian Lin

Yes. We believe the current Chinese economic environment specially the stimulus package plan provides us with good opportunities for new projects coming. Internally, we do have higher expectations than last year from our sales force. And so especially I guess we are looking from the government's support perspective consolidation in the iron and steel industry, and a stimulus plan is also factoring the slowing in the global economic environment, and the government is also subsidizing and promoting the infrastructure spending, which are really a plus across all the industries that we serve not only iron and steel, but also other industries as well.

Alexander Potter – Piper Jaffray

Great. Okay. I guess then following up there I know that you had mentioned what the breakdown was in terms of revenue between these different end markets in 2008, I was wondering if you have a breakdown by end market kind of an expectation for 2009. Do you think iron and steel will still be in that 80% range or do you think some of these other vertical flow will start, I guess incorporating a larger percentage of your revenue?

Brian Lin

We do expect growth in all different sectors, the iron and steel industry will remain the major source of our revenues for 2009, whether it will be around 80% range or not, its hard to say I think it probably would be lower than 80% with the pick-up in other industries like power, like petrochemical, also international markets. So, I think we will be more balanced I think, as I say it's more balanced than 2008.

Alexander Potter – Piper Jaffray

Okay. And then I guess I know that you had mentioned a range kind of a long-range gross profit margin expectation of 45% to 55%, where do you think 2009 will fall within this range?

Brian Lin

For 2009 since the nature of our revenue recognition policy based on percentage completion, and there is sort of lot of the majority of our revenues recognized in 2009 will be actually projects carried over from 2008. So, we do expect that in 2009 that our gross margins will likely be, within the range of 45% to 55% range.

Alexander Potter – Piper Jaffray

Okay.

Brian Lin

Unless something very significantly happens that, we go into the majority of our revenues coming from newer verticals other than iron and steel, in those cases we might have a profit margin towards the lower end, but at this point of time its unlikely.

Alexander Potter – Piper Jaffray

Okay. And then I guess just one last question here on mergers and acquisitions, you mentioned that you are still actively pursuing that strategy I was just wondering if you have any kind of specific comments on recent developments with regard to that potentially in the nuclear sector or in any other sector?

Brian Lin

I think we are very active in looking at opportunities in various new sectors. But at this time, of time, I think our focus will be on cost control and make sure we can win the contracts that are already there and we are experiencing. So, we will try to leverage our strength rather than spread out our resources thin and that, I think especially in this economic environment, we want to make sure we get the shot of our effort.

Alexander Potter – Piper Jaffray

Okay. Perfect thanks. That's my last question. Thank you very much.

Brian Lin

Thank you.

Operator

The next question comes from Adele Mao of Susquehanna International. Please go ahead.

Adele Mao – Susquehanna International Group

Hi. I have several questions, my first question is related to your backlog, you mentioned that your backlog at year-end 2008 is $72 million I was wondering if the international contracts that you mentioned in India and Indonesia are already included in this backlog number?

Brian Lin

No, they are not, Adele these two contracts were signed in this year in 2009.

Adele Mao – Susquehanna International Group

I see okay, so if were to add everything up, you have, $3 million backlog from the international contracts and then you've had two contracts announcements since early 2009 that totals up about six. So, I’d think it's safe to assume that your backlog as we stand today is at least 72 plus 9, it will be over $80 million, is that correct?

Brian Lin

That's not correct, Adele. As I mentioned in my prepared remarks that since after the Chinese New Year we do see a pick up in projects, and we have quite a few award of winning a contract from our customers. Since then because mainly due to the government stimulus plan, and the iron and steel industry's revitalization scheme, which allows our major loyal customers to be able to continue with a proposed build-out, but we do see actually more backlog than what you just described.

Adele Mao – Susquehanna International Group

Okay. So, the number as we stand today should be much higher than just $80 million. Okay, let's move on to the revenue guidance, so if the backlog is, well over $80 million right now. Could you just walk us through how you get to your $88 million to $95 million top-line guidance. Specifically, the percentage of the backlog you expect to book in 2009, and the percentage, the new contract that you sort of need to bring in, in order to reach your guidance?

Brian Lin

Okay. I think you have been, kind of opportunity of a company for the last two or three years. I think if you can see historically about 80% of our backlog will be recognized within next 12 months. So, given that we have about, we have $72 million backlog now. And we are likely to recognize about $56 million in 2009. At this point this is roughly about 60% of our guidance already, and with these new contracts we signed during this last two months, and, we still have 10 months ago, we believe we should be able to, we feel that more contracts and achieve our guidance.

Adele Mao – Susquehanna International Group

Okay, that’s very helpful. Lastly the fire laws that you mentioned that is supposed to come out in May of this year, do you expect the government to in-force the stricter fire safety codes immediately or any penalty related to non-compliance is still sort of up in the air?

Brian Lin

I cannot speak for the government, I think government has been very proactively enforcing these new fire laws. I think we recently actually during the end of the Chinese New Year, there was a big fire in the CCTV station, which caused a lot of attention in the society and also the government. So, they all realized the importance of fire safety and that government is going in the right direction, we all are very hopeful that these will turn into real business opportunities for China Fire.

Adele Mao – Susquehanna International Group

Okay. Just one more question on the balance sheet regarding the accounts receivable, it went up a little bit to $26 million, obviously you guys have booked a lot more revenue this quarter, could you, are you seeing any changes whether its positive or negative on the collection front since early 2009?

Brian Lin

We have Robert answer the question.

Robert Yuan

Yeah Adele. Yes, actually we definitely, currently, we are focused on this our [accompanied] people management, and also maybe if you want to take a look at our DSOs, lets say on our current basis for the year 2008, so, its basically in the range of from 1 to 10 days to 1 to 20 days. So, actually that means our account receivables increased reasonably with our revenues. So, I think we do in a comfortable range of our account receivables.

Adele Mao – Susquehanna International Group

Okay, that's great. Thanks very much.

Robert Yuan

Okay.

Brian Lin

Thank you, Adele.

Operator

The next question comes from Tim Hanson of The Motley Fool. Please go head.

Tim Hanson – The Motley Fool

Hi Brian and Robert. How are you guys?

Brian Lin

Hi Tim, how are you?

Robert Yuan

Hi.

Tim Hanson – The Motley Fool

Good thanks. I just had a, my first question and I saw the big jump in product sales this quarter and I was just wondering what the driver behind that that big jump was?

Brian Lin

Okay. I think we mentioned in the conference call earlier that…

Tim Hanson – The Motley Fool

I'm sorry.

Brian Lin

It is mainly because of the post-Olympics activities, during the Olympics lot of the shipping was halted, and some of the projects were also slowdown. So, that’s why we got to back-fill those contracts in the last quarter.

Tim Hanson – The Motley Fool

Okay, perfect. And my second question was on the maintenance revenues. Do you see any effects right now from any plant slowdowns, reducing maintenance revenues, and then over the longer term though the industry consolidation should help, assist to the contracts and product sales will consolidation have any effect on maintenance revenues?

Brian Lin

On the maintenance revenues, I think right now its very small percentage as compared to our total revenue since we do. We are really looking at much bigger projects to leverage our strength. Maintenance is something we always would like to have if possible, it's not the focus of the company at this time of the year, but I think with these major consolidation since we are serving our customers well, and we'd like to see that they are able to have maintenance service with contracts plus as well after the one-year warranty period is completed. So, we do hope that we are able to provide overall maintenance services to the customer as well.

Tim Hanson – The Motley Fool

Okay. And then lastly, I was very impressed with the cash line on the balance sheet this quarter. I was wondering if you guys had given any thoughts to maybe doing a repurchase or following through on a repurchase now that you have sort of this in addition to any M&A you're looking at. Now that you have some excess cash and I think, and I don’t think the American market is giving your company as much credit as it deserves right now?

Robert Yuan

Right, right. May be, I think the cash we have that is important to support our growth. We want to really manage those cash very carefully, when time permits, when opportunities come, we will pursue M&A activities by using some of the cash available. But I think we are, going forward we would try to, when opportunities comes, we might do share buyback as well as we, the Board already approved for the share, the $10 million worth of share buyback program. We will do whatever best for the shareholder to improve our EPS.

Tim Hanson – The Motley Fool

Okay. I would love to see do that if you get the chance, so would that be great. And those are all my questions. Thanks guys.

Robert Yuan

Okay. Thank you.

Operator

The next question is from Yan Cheung of Roth Capital Partners. Please go ahead.

Yan Cheung – Roth Capital Partners

Hello good evening.

Brian Lin

Hello.

Yan Cheung – Roth Capital Partners

Congratulations on your good quarter.

Brian Lin

Thank you.

Yan Cheung – Roth Capital Partners

And most of my questions have been answered. So, I just only have a minor question on your SG&A expenses I noticed that you have higher expenses this quarter than the previous, and so do you expect to the next level SG&A costs going forward?

Robert Yuan

Okay. For the SG&As as we have been pretty much consistent at around 20%, between 19% to 21%. So, we do see these continue over the next couple of years. Even though, we might have a better SG&A as we have some operating efficiencies as we grow our revenues. But I think the last quarter we have increased slightly in the SG&A because of the year-end incentives, and related sales efforts to get ready for the next years sales opportunities, but it’s a not something very extraordinary. So, in summary we do see that we would like to maintain these SG&A level around 20%.

Yan Cheung – Roth Capital Partners

All right. Okay. Thank you very much.

Robert Yuan

Okay. Thank you.

Operator

(Operator Instructions). We have a question from [Vincent Wong], a Private Investor. Please go ahead.

Vincent Wong – Private Investor

Hello. This is Vincent Wong. I’m from Shanghai and congratulation on your fourth quarter. Well I have a couple of questions. The first one I know for 2009 the post tax rate is about 13%, but eventually the tax rate should be 25%, so which year will be, the tax rate will be 25%?

Brian Lin

Okay. Currently, our tax rate is for the foreign investor company our rate is, nominal rate is 12.5%, which we will restart in 2009 and continue on to 2010 and 2011. And after that we would be subject to 25%. However, we are also being approved as a high–tech company, which in China we might be subject to a 15% reduced tax rate. But we are not at this time that we can do I think we are enjoying 12.5%, which is better than 15% now.

Vincent Wong – Private Investor

Okay. So, from 2012, the tax rate will be 25% right.

Brian Lin

Right over 15%

Vincent Wong – Private Investor

Okay. Second question do you have annualized future financial outlook for 2009 and 2010. Do you see 2009, your business will fall, if not how could you like to take action against current declining market?

Brian Lin

Okay. In my previous prepared remarks I stated that our guidance for 2009, which I can repeat for you. We think the number the revenue will grow between 28% to 38% to a range of $88 million to $95 million. Our pre-tax income is expected to grow between 22% to 32% a range of $30.2 million to $32.6 million. So, we do see positive growth in 2009 for China Fire.

Operator

There are no further questions at this time. At this time the conference has ended. You may now disconnect your line.

Brian Lin

Okay. Thank you.

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Source: China Fire & Security Group, Inc. Q4 2008 Earnings Call Transcript

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