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Cleantech Solutions International Inc. (NASDAQ:CLNT)

Q4 2012 Earnings Call

April 12, 2013 9:00 AM ET

Executives

Elaine Ketchmere – IR

Adam Wasserman – VP, Financial Reporting

Ryan Hua – VP, Operations

Mabel Zhang – IR

Analysts

John Harrell – Harrell & Associates

Operator

Good morning and welcome to the Cleantech Solutions International 2012 Fourth Quarter Earnings 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. I will now turn the call over to Elaine Ketchmere.

Elaine Ketchmere

Thank you, operator. Good morning, ladies and gentlemen and good evening to those of you joining in from China. I’d like to welcome all of you to Cleantech Solutions’ earnings conference call for the fourth quarter and full year 2012.

With me today on the call are Cleantech Solutions’ CFO Mr. Adam Wasserman; and Vice President of Operations, Mr. Ryan Hua. Also on the call is Mabel Zhang from CCG Investor Relations who will provide translation for Mr. Hua.

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

Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of these risks and uncertainties in the company’s filings with the U.S. Securities and Exchange Commission, particularly in the risk factors in our Form 10-K for the year ended December 31, 2012 and management’s discussion and analysis of financial conditions and results of operations in our Form 10-K for the year ended December 31, 2012.

In addition, any projections provided as to the Company’s future performance represent management’s estimates as of today April 12, 2013. Cleantech Solutions International Inc. assumes no obligation to update these projections in the future as market conditions change.

At this point, I would also like to state that on this call will be discussing non-GAAP financial measures including adjusted EBITDA, adjusted operating income, adjusted net income and diluted EPS. We present these financial measures as a supplement to our GAAP results because we believe they provide useful information in analyzing and benchmarking the performance of our operations and assists investors in analyzing our year-over-year financial performance.

Please visit our earnings press release, a copy of which is on our website and has been filed with the SEC as an exhibit to our Form 8-K for a complete reconciliation of these adjusted items to their closest GAAP measure.

And now, it’s my pleasure to welcome Cleantech Solutions CFO, Mr. Adam Wasserman who will deliver management’s prepared remarks covering operations and financial performance today. Adam, please proceed.

Adam Wasserman

Okay, thank you, Elaine. Good morning everyone and thank you for joining us on our call today. We appreciate your continued interest and support in Cleantech Solutions. I’d like to begin by commenting briefly on our delay in filing with our 10-K. As you all may know, our previous accounting firm Sherb & Company combined its practices with RBSM LLP earlier this year.

As part of business transition, there was a change in the personnel assigned to our audit, our financial statements, unfortunately the new team was unable to complete its audit in sufficient time for us to make a timely filing with the SEC.

We were disappointed in the delay which was due to factors outside our control. Now that we have moved beyond these initial transition issues with RBSM, we expect to return to our normal pattern of timely filings with the SEC.

Turning to our fourth quarter and full year results, in 2012, we saw a slight increase in revenue, we’re profitable and generated positive cash flow from operations despite a challenging environment in China that impacted capital spending and demand from customers in our key markets. We successfully modified our portfolio of precision products to meet demand in a variety of industries while maintaining careful control on our costs.

We closed the year with 28% growth in our top-line for the fourth quarter making the third consecutive quarter of improving revenue. Our growth in the fourth quarter was driven by strong demand for our patented airflow-dyeing machine and improving sales of forged products to customers in the wind power industry.

We are pleased with the performance of our dyeing and finishing equipment segment, which grew 66% and accounted for more than half of revenue in the fourth quarter. Our air-flow dyeing machine command a higher margin than our traditional dyeing machines and as a result, gross margins rose 3.1% in the fourth quarter of 2012 to 26.8%.

We continued to benefit from a major upgrade cycle as manufacturers embraced our more efficient energy and environmentally friendly air-flow dyeing machines. We expect this trend to continue in 2013. So far this year, we have reached a total of five purchase orders from new and existing customers to supply 147 units of dyeing machines including 85 air-flow dyeing machines for an aggregate sales price of approximately $8.9 million.

According to China National Textile and Apparel Council from January to February 2013, China reported total exports of textile and fashion products of $42.3 billion representing 31% year-over-year growth. This is 31% points higher than that from the same period of last year. Accordingly to the council, Chinese textile exports are expected to maintain steady growth in 2013.

We are close to full utilization of our dyeing and finishing equipment capacity. So we recently added shifts and workers to keep up with the demand. We have also placed orders for new equipment to expand capacity. We expect revenue from this segment to continue to increase in the near future.

In November of last year, we were granted a patent by the State Intellectual Property Office, the PRC for our air-flow dyeing production technique. We believe this speaks to our ability to develop proprietary and innovative production processes, improved product quality and enhance our market competitiveness.

The patent provides exclusive use of our production technique in dyeing equipment for ten years. We have several other patents pending and we remain committed to maintaining our product development efforts. To that end, we are introducing a new line of after-treatment equipment. The first model is a compact machine which is used in the final finishing of knitting material such as cotton and it’s designed to improve the softness, reduce shrinkage and ensure better dimensional stability.

We shipped the first model to our customer earlier this year for testing on the normal operating conditions. Our compacting machine is made of stainless steel and top-grade compacting felts which should result in improved finished fabric quality.

We plan to extend this product line and are currently building a prototype of another model of after-treatment equipment. Our equipment will be placed – replace similar products currently being used in Chinese textile manufacturers which are often imported from Germany and the United States.

Although we had some softness in sales of forged products to non-wind customers in the fourth quarter, we have positive outlook for this area of the business. We are excited about the potential in China’s oil and natural gas industry and are currently exploring opportunities to become a licensed or qualified supplier of components.

We are currently building prototypes of flanges and pipes for customers and once we become a qualified supplier, we will be able to market them to these subsidiary companies of Sinopec, CNPC throughout China. Of course we cannot predict the timing or extent of any sales.

After several quarters of reduced orders, we saw a nice uptick in demand for forged products from wind-power customers in the fourth quarter of 2012. Sales of forged products to wind customers grew 60% year-over-year to $5.6 million. However this does little to change our near-term view on the wind-power industry in China.

Although recent data from the China Wind Energy Association cites that wind power surpassed nuclear and becoming the third largest source of electric power in China. The industry remains forward and challenged. Issues of wind turbine, overcapacity, grid connectivity issues, international trade protectionism and tight credit conditions persist.

In fact, the growth rate of new capacity actually slowed in 2012 to 14-gigawatts from about 21-gigawatts in 2011. Given the environment, we anticipate sales volume of forged products to customers in the wind-power industry will remain around the current levels for the remainder of 2013.

We are hopeful that over the longer-term, these issues will be resolved as China moves forward with its goal to reach 100-gigawatts of installed wind-power capacity by 2015 and 200-gigawatts by 2020.

In 2012, we generated revenue from the sale of solar industry-related products of approximately $1.1 million, up from $0.5 million in 2011. At year end, we had to pause from our international solar customer of $1.6 million, namely for sapphire chambers to be used in smartphones and LED TV screens and we expect to ship these products during 2013.

The solar industry is facing challenges of its own. Due to trade friction in Europe, where duties are being imposed on imports from China, many small and mid-sized manufacturers have suspended production and in an effort to ease tension, the Chinese Government have extended an branch by dropping import duties and value-added taxes on solar cells.

It remains to be seen what impact if any this will have on Chinese solar manufacturers and demand for our products. At the same time, we remain helpful that the recent initiatives by the Chinese Government requires smaller operators to be integrated into the grid free of charge will begin to impact demand by the end of the year.

Now let’s move on to the financial section. Let’s take a look closely at our financial performance. I would encourage you to refer to our Form 10-K with the SEC and our earnings press release issued yesterday.

Before discussing this quarterly results, I will briefly highlight our financial performance for the year ended 2012. Our fiscal year 2012 revenue was $57.2 million, up slightly from $55.6 million in 2011.

Gross profit was $13.1 million with a gross margin of 23%. Due to increased utilization and tight control over expenses, we saw a healthy increase in adjusted net income which rose 15.3% to $6.6 million or $2.51 per diluted share. Please note that our earnings per share amount have been adjusted to reflect the 1 for 10 reverse stock split effective March 6, 2012.

Turning to the fourth quarter results, our revenue for the fourth quarter of 2012 increased 28.3% to $17.6 million, compared to $13.7 million for the same period of 2011. Our gross profit for the quarter rose 38.2% to $4.2 million, compared to $3.1 million for the same period in 2011.

Gross margin improved to 24.1% during the fourth quarter of 2012, compared to 22.4% for the same period a year ago. The increase in gross margins for the fourth quarter was primarily due to two factors, first, we experienced increased operational cost efficiencies for forged rolled rings and related product segment, including the allocation of fixed costs primarily consistent of depreciation to cost of revenue as we operated at higher production levels.

Second a significant portion of revenue for the dyeing and finishing segment was generated from the sale of air-flow dyeing machine which generated a higher gross margin than our traditional dyeing machinery.

Operating expenses increased 90.8% to $3.5 million compared to $1.8 million in the comparable period last year. The increase was primarily due to a non-cash impairment loss of $2.2 million as a result of writing down the carrying value of electro-slag-remelting equipment to its estimated fair value based on an impairment assessment conducted on the equipment which is classified as held for sale at December 31, 2012.

Selling, general and administrative expenses for the year, three months ended December 31, 2012 fell 27.6% to $0.9 million as compared to $1.2 million a year ago. The decline was primarily due to low bad debt expenses in the fourth quarter of 2012. As a result, our operating income decreased 40.8% to $0.7 million.

Adjusted operating income, a non-GAAP measurement, which adds back the operating income, the impairment loss was $2.9 million, up 139% from the same quarter last year. Adjusted operating margin was 16.7%. Other expense was $46,000, relatively unchanged from the same period in last year.

Adjusted EBITDA, a non-GAAP measure, which adds back to net income interest expense, income taxes, warrant modification expense, impairment loss, depreciation and amortization, was up 60.4% to $4.8 million, compared to $3 million in the same quarter last year.

Net income was $0.5 million or $0.17 per diluted share, compared to $0.8 million, or $0.31 diluted earnings per share in the fourth quarter of 2011. Adjusted net income, a non-GAAP measure, which does not deduct impairment losses and warrant modification expenses, was $2.7 million, or $0.98 diluted earnings per share, up 238.5% from the same quarter last year.

Now let’s turn to our balance sheet. As of December 31, 2012, we held cash and cash equivalents of $1.4 million compared to $1.2 million at December 31, 2011. Accounts receivable were $10.1 million and total current assets were $19.1 million. We had $2.2 million in short-term bank loans and stockholders' equity was $78 million.

In 2012, we generated $10.6 million in cash flow from operations. Capital expenditures in 2012 were $10.7 million. For 2013, we expect the most of our spending will be oriented toward new equipment to expand capacity of air-flow dyeing machines and new product development including after-treatment equipment and oil and natural gas products.

We closed the year on a positive note and have seen this momentum – expect this momentum to continue into 2013. Our dyeing and finishing equipment segment is performing extremely well and we are adding capacity and expanding our product offerings to capture growing demand.

We are excited about opportunities for expanding our portfolio of forged products for non-wind applications, especially in the area of oil and natural gas. While near-term challenges remain in both the wind and solar markets, the long-term outlook is positive. In the mean time, we will continue to diversify our revenue base and modify our product portfolio to cater to other heavy equipment industries and other clean technology industries.

We want to thank you all of our investors for your continued support. With that, we will now open the call to questions-and-answers from the audience.

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from John Harrell from Harrell & Associates.

John Harrell – Harrell & Associates

Good morning and congratulations on a good year. Recently Geoinvesting, a notorious China small cap short seller had taken an interesting in CLNT, executed initial round of due diligence which came back fairly favorable. However they just recently put out a note that they are unable to get the company to allow them to execute their final stage of due diligence and I’m just wondering why, especially with China small caps not getting respect whatsoever. It seems like the company would open – would welcome Geoinvesting with open arms.

Adam Wasserman

In terms of my knowledge is that I am not aware of them making any – an attempt to get into the company. So, maybe we can ask Ryan Hua who had contacted.

John Harrell – Harrell & Associates

Is Ryan available right now?

Operator

Yeah, yeah, here. Hello.

John Harrell – Harrell & Associates

Yes.

John Harrell – Harrell & Associates

Mabel?

Mabel Zhang

I am sorry, I was on mute. Go ahead. Ryan.

Ryan Hua

[Foreign Language – Mandarin]

Mabel Zhang

[Foreign Language – Mandarin]

Ryan Hua

[Foreign Language – Mandarin]

Mabel Zhang

So, actually, yes we – regarding interest from Geoinvesting however we – busy in preparing earnings. We do plan to – them to have a discussion how we may work together after the earnings call.

John Harrell – Harrell & Associates

Okay, fair enough. And Adam, I’ve got another question, in the business outlook portion of the PR last night, the company shares; we saw a nice increase in demand from wind-power customers in the Q4 of 2012 and expect sales to remain near these levels in the remainder of 2013.

Now with the company doing a earnings per share adjusted of $0.98 in Q4, am I taking that statement to mean that sales going forward, that statement really only applies to wind-power customers or is this something where you are saying – the company is saying that, shareholders can expect somewhere around the neighborhood of $0.98 per share for the next – each quarter for the next four quarters?

Adam Wasserman

We haven’t projected at the third quarter yet, but, I mean, the sales for the dyeing and finishing machine is still very positive. And we expect to have orders from the forging for the wind and non-wind in the fourth quarter. And again, sometimes it depends on when the product is finished, as a sort of a longer production cycle on some of these things. But, we have a positive outlook that will continue in our current path.

John Harrell – Harrell & Associates

So as far as saying, that the company expects sales to remain near these levels for the remainder of 2013, you are basically saying that applies for the full quarter and not just the wind-power segment?

Adam Wasserman

It’s basically for everything.

John Harrell – Harrell & Associates

Okay. Fair enough. I appreciate it. Thank you. Congratulations again.

Operator

(Operator Instructions) I am showing there are no questions at this time.

Adam Wasserman

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

Operator

Thank you. This concludes the conference call. You may now disconnect.

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