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Jinpan International Limited (NASDAQ:JST)

Q4 2012 Earnings Conference Call

March 15, 2013 8:30 a.m. ET

Executives

Mark Du - Chief Financial Officer

Albert Sheng - Vice President of Investor Relations.

Analysts

Joe Bess - ROTH Capital Partners

Douglas Ruth - Lenox Financial Services

Lance Brian - UBS

Operator

Good morning ladies and gentlemen. Welcome to today’s Jinpan International Incorporated fourth quarter and full year 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 of 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 the results, performance or expectations implied by this forward-looking statement. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors 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. Albert, please go ahead, sir.

Albert Sheng

Thank you operator and thank you everyone for joining today’s conference call. I’m going to review the fourth quarter operational results and update you on our business strategy. Afterwards I will turn the call over to Mark Du who will more thoroughly review our financial results.

We’re pleased to have met our full year financial revenue and net income financial forecast given the slower economic environment in 2012. Business activity in the fourth quarter moderated as expected due to slower domestic and international order demand. Fourth quarter gross margin was negatively impacted by lower silicon field prices which resulted in a more competitive pricing environment for our cast resin transformer.

Silicon field prices in the fourth quarter remained at historic lows of RMB13,000 to RMB14,000 per ton as compared to RMB14,000 to RMB15,000 per ton in third quarter and RMB16,000 to RMB17,000 per ton in earlier 2012. Despite these market conditions, we implemented a number of important measures in the last year to enhance our product quality and improve our competitive position, which we believe leads to improved performance this year.

In the fourth quarter, our domestic China sales accounted for $48.5 million or 90.8% of net sales compared to domestic China sales of$59.8 million in the same period last year. Lower infrastructure investments contributed to the decline in sales revenue. While the economic environment in China was challenging in 2012, our outlook is improving as we enter 2013. Operationally, we’ve been evaluating the most effective way to run our business. This included implementing a 10% headcount reduction across our property in 2012.

To maximize product sales, we restructured our sales team from one organized based on geographic location to one organized based on industrial application. For example we now have sales teams specifically at the serving customers in translocation, serve infrastructure, iron, steel and other industrial efforts. This new sales team structure concentrates experience and expertise and enables us to provide a high level of service to our customers.

In our international business, net sales outside of China for the fourth quarter were $4.9 million, or 9.2% of net sales as compared to $4.3 million, or 6.7% of net sales for the same period last year. Our largest OEM customer placed fewer orders with us in the fourth quarter of 2012 as compared to the same period last year. Despite that, fourth quarter 2012 export sales revenue increased to the prior year period because we sold to a more diversified customer base.

As of the end of 2012, we are qualified suppliers to three large international OEM’s. The majority of our international sales still come from one of the three OEM’s. However, export sales to our other two OEM’s as well as to other customers in 2012 increased over that in 2011.

Our largest OEM customer placed fewer orders with us in the second half 2012 for transformers for wind energy applications because of design changes to the wind and power products, for which we had to design new wind power transformers and our customer had to prequalify these transformers. In the fourth quarter 2012, our wind power transformers successfully passed our largest OEM customer’s qualification tests. In the first quarter of 2013, we have received significant purchase orders from our largest OEM customer for these wind power transformers.

We also continued to explore new customer opportunities. We’re hopeful that we can become qualified suppliers to two additional OEM customers this year. In January, we completed the construction of our Guilin facility. We expect to formally begin production by the end of the first quarter 2013. This new facility is equipped with state of art manufacturing equipment for the production of cast resin transformers. It is our most integrated and technologically advanced full scale manufacturing facility. Compared to our Haikou facility, production in the Guilin facility requires less labor and we provide a greater degree of automation.

We expect the Guilin facility to gradually ramp up production over the next two year period. When fully equipped and offering maximum capacity, we believe that the Guilin facility can support transformer production of up to 12 million KVA per year, which will effectively double our cast resin transformer manufacturing capacity. Financially, our 2013 bottom line will be impacted by increased costs associated with operating the Guilin facility, which primarily includes depreciation and interest expense.

Turning to our gas insulated switchgear products, our gas insulated switchgears are gaining increased recognition in the marketplace which we saw in sales improvement in the second half of 2012. We shipped $2.2 million worth of gas insulated switchgear products in 2012. We believe that sales of gas insulated switchgear products can double this year. Looking at our VPI products, we are in talks with a major Japanese customer which could result in improved sales in 2013.

Our backlog continues to grow. At the end of the fourth quarter our backlog was approximately $138 million, up 33% from $104 million at the end of Q3. We are more encouraged with our outlook for 2013 as we believe the infrastructure and spending in China will increase in the second half of the year. With an improving economic outlook in China, along with Jinpan’s expanding manufacturing capacity, our growing customer base and (inaudible), we expect more customer orders in 2013 compared to 2012.

We believe our domestic and international businesses are well positioned for long term success as we develop high value and high quality products, incorporate state of art technology into our manufacturing process and enhance our competitive edge and market position for our cast resin transformers.

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 address our current financial forecast. Mark?

Mark Du

Thank you, Albert. I’m going to describe our fourth quarter consolidated results and outlook for full year of 2013.

Net sales for the fourth quarter were $53.4 million, a 16.7% decrease from $64.1 million in the same period last year. The decrease in sales was primarily the result of lower domestic China sales compared to the prior year period. In the fourth quarter, domestic China sales accounted for $48.5 million, or 90.8% of net sales, compared to $59.8 million, or 93.3% of net sales in the same period last year. Net sales outside of China for the quarter were $4.9 million, or 9.2% of net sales compared to $4.3 million, or 6.7% 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 $50 million, or 93.6% of net sales in the fourth quarter, while wind energy products which include cast resin transformers and VPI products for wind power applications, represented $3.4 million, or 6.4% of net sales during this quarter.

Gross profit in the fourth quarter decreased 26.5% year over year to $16.3 million from $22.2 million in the same period last year. Fourth quarter 2012 gross profit margin was 30.5%, compared to 34.6% in the prior year period, and 33.3% in the third quarter of 2012. Gross margin decreased in the fourth quarter mainly due to lower average selling prices for cast resin transformers.

Selling and administrative expenses in the fourth quarter were $14.0 million, or 26.2% of net sales, compared to $16.2 million, or 25.3% of net sales in the same period last year, and $14.8 million, or 25.2% in the third quarter of 2012. Selling expenses as a percentage of net sales decreased sequentially in the fourth quarter due to lower domestic product sales.

Operating income for the fourth quarter decreased 60.8% to $2.3 million, or 4.4% of net sales from $5.9 million, or 9.3% of net sales, in the same period last year.

Net income for the fourth quarter decreased 29.1% to $3.8 million, or $0.23 per diluted share, from $5.4 million, or $0.33 per diluted share, in the same period last year. Fourth quarter net income, as a percentage of net sales, was 7.2% compared to 8.4% in the same period last year.

Regarding full year 2012 results, total sales decreased 3.8% to $210.5 million from $218.9 million in the prior year.

Gross profit in 2012 decreased 14.3% year-over-year to $68.8 million from $80.3 million and gross profit margin decreased by 401 basis points year over year to 32.7% from 36.7%.

Selling and administrative expenses in 2012 were $53.9 million or 25.6% of net sales, compared to $54.3 million, or 24.8% of net sales, in the prior year.

Operating profit in 2012 decreased 42.7% to $14.9 million, or 7.1% of net sales, compared to $26.0 million, or 11.9% of net sales, in the prior year.

Net income in 2012 decreased 41.1% to $14.1 million, or $0.84 per diluted share, compared to $23.9 million, or $1.45 per diluted share, in the prior year.

As of December 31, 2012, the Company had $18.5 million in cash and cash equivalents, compared to $24.2 million at December 31, 2011. The Company's accounts receivable on December 31, 2012 totaled $124.6 million, compared to $110.4 million at December 31, 2011. Notes payable in the fourth quarter of 2012 decreased to $6.0 million compared to $13.6 million on December 31, 2011. Total bank loans outstanding at December 31, 2012 were $44.0 million, compared to $23.0 million at December 31, 2011 and $33.9 million at September 30, 2012.

As of December 2012, the Company had backlog of approximately $138 million, compared to $104 million as of September 30, 2012.

For the full year 2013, the Company currently anticipates net sales of $231-$241 million, an increase of 10% to 15% over 2012 and a net income of $14.0-$14.5 million, which represents increase of 0% to 3% compared to 2012. Net profit is expected to trend at lower levels primarily due to fixed costs associated with the Company's Guilin facility.

This forecast is subject to change in 2012 in the company’s appearance improves, levels of international sales orders, as well as greater than forecasted sales in companies (inaudible) manufacturing facility resulting in higher levels of manufacturing output.

That concludes our remarks for today’s conference call. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll go first to Joe Bess with ROTH Capital Partners.

Joe Bess - ROTH Capital Partners

You spoke a little about your 2013 outlook and I believe there will be an acceleration of infrastructure spending in China in the back half of 2013. I was hoping you can talk a little bit more about what you’re seeing. Is this really a function of receiving orders from the larger OEM whose design has been approved and increased demand for gas insulated switchgear?

Mark Du

Yeah. We expected in China the infrastructure spending will increase probably second half of the year and sales first half of the year.

Albert Sheng

Let me clarify something, Joe. So infrastructure in China primarily impacts our domestic sales in China. The sales that you mentioned, including of course sales of gas insulated switchgear -- but I think the sales OEM’s that you mentioned probably has more to do with our export sales rather than our domestic sales and basically I think government policy regarding wind energy in U.S and Europe has the more impact on those sales than policy in China.

Joe Bess - ROTH Capital Partners

So then when we think about the year over year increase your outlook, is that really more a function of just the China infrastructure spend?

Mark Du

No. Actually including both.

Joe Bess - ROTH Capital Partners

And then the government grant that you received in the quarter, how much was that? Can you disclose that?

Mark Du

Yeah. For the quarter we received about $2 million.

Joe Bess - ROTH Capital Partners

$2 million? So excluding that we should have seen about a $0.3 million or so in other income?

Mark Du

Yes. Other income majority of that is government grant. We received roughly about $2 million government grant and actually this is based on the tax that we paid before due to our R&D research project which was approved by government. So government gave us an incentive for the money we spent on R&D and also due to some tactile investments that we invest in the company and the government gave us all those incentives. And we have been applying this every year and sometimes we get more approved. We receive money from government and sometimes we cannot get approved. So every year we do this. I think every year we receive roughly $1 to $2 million government grant. It depends on approval from government.

Joe Bess - ROTH Capital Partners

And then can you talk a little bit more about your gross margin and operating expenses in 2013. With pricing where it is, is this where you’re anticipating in the first half of the year and then an improved outlook in the second half with pricing?

Mark Du

The pricing environment now is more stable now because of silicon, steel price is at very low level. So we’re expecting pricing to be stable. We do hope that the second half of the year the pricing environment will improve and gross margin in 2013 we expect will be lower compared to 2013 and this is mainly due to our Guilin facility that is now fully operational, but we had to take depreciation for the manufacturing side. That will increase our cost. So that will impact our gross margin.

Joe Bess - ROTH Capital Partners

And then similarly with operating expenses, with increased sales and some additional - and the reduction in headcount of about 10% last year, should we be anticipating that operating expenses increases on a dollar amount but decreases on a percentage of sales?

Mark Du

Yes.

Joe Bess - ROTH Capital Partners

And then just last question is, what should we be anticipating for depreciation and amortization looking out into 2013 with the new facility?

Mark Du

In the new facility?

Joe Bess - ROTH Capital Partners

With the new facility added.

Mark Du

With the new facility added, we expect about $7 million depreciation.

Operator

(Operator Instructions). We’ll take our next question from Doug Ruth with Lenox Financial Services.

Douglas Ruth - Lenox Financial Services

Is there an opportunity to sell some transformers in America with hurricane Sandy and that effect?

Albert Sheng

So we don’t know -- we do have sales in the U.S, but we don’t know whether these sales can be attributed to any specific event.

Douglas Ruth - Lenox Financial Services

Are you seeing any impact now that the wind power bill was expanded to 2013? Do you think that the wind power sales could be higher than perhaps you were initially thinking?

Albert Sheng

Yes. We do expect that I guess with the tax credit approved or extended for 2013 for wind power. That will have a positive impact on our customers which in turn is likely to have a positive impact on our sales of our transformers wind power.

Douglas Ruth - Lenox Financial Services

So perhaps the wind power sales could take off in the second half of the year, is that what you’re suggesting?

Albert Sheng

We believe that there will be an increase in sales of transformers wind power applications in 2013 as compared to 2012.

Douglas Ruth - Lenox Financial Services

You said that your largest export customer was happy with the redesign. Has there been any feedback on you shipped more products in 2013. Has there been any feedback on the products that they bought?

Albert Sheng

There hasn’t been a feedback there. After we qualified the new products with them in the fourth quarter of 2012 we received a significant amount of purchase orders from our largest OEM customer for these new products in first quarter 2013. But assume that our products are meeting their clinical requirements, but it will take a while before these products go n the field and we get any feedback from our customers on that.

Douglas Ruth - Lenox Financial Services

When will you work down the backlog, this record backlog?

Albert Sheng

You mean how long do we -- can you rephrase that question, Doug?

Douglas Ruth - Lenox Financial Services

We have this very high backlog. How much do you think you’ll work down to the end of first half of 2013?

Mark Du

First half of 2013, this backlog we’re going to shift throughout the year and including third quarter and fourth quarter 2013. We expect about 60% will be shipped in the first half.

Douglas Ruth - Lenox Financial Services

60%? Okay. What is your research and development budget for 2013 versus 2012?

Mark Du

2012 we had $9.3 million total R&D spend and 2013 we also expect around in this range, around $9.3 million.

Douglas Ruth - Lenox Financial Services

One of the things that we’ve talked about on the call for a while is the valuation of the stock and Jinpan stock trades at a discount to its book value in a much lower price earnings ratio than ABB and Siemens. Could you offer some commentary on that?

Albert Sheng

Sure. Well, Jinpan is a much smaller company and probably a more specialized company in terms of product line compared to ABB and Siemens which are much more diversified and bigger in scale. We have taken steps, our board has taken steps last year with the issuance of a special dividend and moving to -- payments of moving to payments of reported dividend for 2013. So we are monitoring the situation and we believe that with our expected improvement in performance in 2013, our stock price will reflect that too.

Douglas Ruth - Lenox Financial Services

Okay. Is there any commentary from the chairman? He owns this fairly large portion of stock. We don’t really hear what his future plans are. Is he going to retire at some point or what do we hear from the chairman?

Albert Sheng

Presently our CEO and chairman of the board does not have any retirement plans that we know of. We have just built a new facility in Guilin. It’s a brand new and very state of art facility with high level automation and our management team, including Mr. Li, is working very hard to make sure that facility is up and going and contributing to our sales revenue.

Douglas Ruth - Lenox Financial Services

My final question is, what do you think you have to do to secure the two additional OEM’s that you’re working with to try to make that happen in 2013?

Albert Sheng

We think that we have a pretty firm offer. We have been working with them throughout 2012 actually. So we believe that we are pretty close to become qualified suppliers for them. I’m not in the sales department so I can’t give you a precise date, but we believe that there’s a very good chance that we’ll be able to become qualified suppliers for them this year.

Operator

(Operator Instructions). We’ll take our next question from [Lance] Brian with UBS.

Lance Brian - UBS

I just have a couple of questions and observations which may or may not be accurate, but my feeling in looking at the different locations of just the facilities in China, that Guilin should in the structure stimulus by the government, cover the inner areas of China. We would be in a much better position to transport or heavy transport our transformers and other equipment to our customers. What kind of savings in transport do you feel that Guilin will give us in transporting our equipment to our customer?

Mark Du

Not only Guilin, but also Wuhan. Wuhan is in the middle part of China. So it’s very convenient for us to ship our product from Wuhan to all over the present China. And also Guilin the facility we are located it’s not too far from highway and it’s also very easy to ship to west part of China. So this is able to save us the transportation cost in terms of purchasing material from our supplier and also we save the transportation cost when we ship to our customer. From our past experience we should be able to save 3% to 4% of transportation costs compared with before.

Operator

And at this time I show no additional questions in queue and I would now like to take the time to turn the call back over to management for any closing remarks.

Albert Sheng

Thank you everyone for coming on to today's conference call. Mark and I are always here and we’re happy to take your questions. So please don't hesitate to follow up with us with further questions. Thank you.

Operator

And that does conclude today's conference. Ladies and gentlemen, we’d like to thank you for your participation. You may now disconnect. Nice day.

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