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Cleantech Solutions International, Inc. (NASDAQ:CLNT)

Q1 2013 Earnings Call

May 16, 2013 9:00 AM ET

Executives

Elaine Ketchmere – IR

Adam Wasserman – VP, Financial Reporting

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cleantech Solutions’ First Quarter 2013 Earnings 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. I will now turn the call over to Elaine Ketchmere, with CCG Investor Relations. Please go ahead.

Elaine Ketchmere

Thank you, operator and good morning ladies and gentlemen, and good evening to those of you joining in from China. I would like to welcome all of you to Cleantech Solutions’ earnings conference call for the first quarter of 2013.

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 the 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 including factors described in Risk Factors 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 and Management’s Discussion and Analysis of Financial Conditions and Results of Operations in our Form 10-Q for the year ended March 31, 2013.

In addition, any projections as to the company’s future performance represent management’s estimates as of today May 16, 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 ask – I would like to state that on this call we will also be discussing a non-GAAP financial measure, adjusted EBITDA. We present this financial measure 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.

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 adjusted EBITDA to the 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

Thank you, Elaine. Good morning everyone and thank you for joining us today on our call. We appreciate your continued support and interest in Cleantech Solutions. We got off to a strong start in 2013 achieving 48% growth in revenue and 366% growth in diluted earnings per share. This outstanding performance was due primarily to our dyeing machine segment which saw revenue increase more than 90% as a result of demand for our new equipment design to meet current environmental standards.

We believe this increase reflects the response of textile manufacturers to seek to meet the policies of local PRC governments to phase out obsolete equipment and reduce pollution from the dyeing process. We are approaching full utilization of our dyeing and finishing equipment capacity. Based on our current discussion with textile customers regarding orders for the second half of the year, we expect strong order book flow to continue throughout 2013. As a result, we use cash flow from operations allowing some short-term bank debt to purchase new equipment to meet this anticipated demand. We paid the initial deposit for the equipment and while we wait for the various government approvals, we are training staff, working on product design and building prototypes. We expect the new equipment to begin production by the end of the year.

We continue our efforts to expand our portfolio of precision products to meet demands in end markets with favorable prospects of growth. We are making good progress of our new line of after-treatment equipment for the textile industry. Our new compact machine which is used for the finishing of knitting material, such as cotton is designed to improve the softness, reduce shrinkage, and ensure better dimensional stability. We shipped the first model to our customer for testing on the normal conditions earlier this year. We are currently making adjustments to the model based on feedback from our customers and help to secure orders in the coming months.

We are confident on new line of after-treatment equipment will be attractive to Chinese textile manufacturers, and it will be similar quality as products imported from Germany and the U.S. at a more attractive price. Despite the slowdown in sales in the first quarter of 2013, we see a lot of opportunities for growth in sales of forged products to non-wind customers. We have made good progress towards becoming a license or qualified supplier of components to Chinese oil and natural gas industry. Sinopec and CNPC, has accepted the fringe and pipe prototypes shipped earlier this year, and we are now waiting to receive the final approval to become qualified suppliers. We will then be able to market our components to the subsidiary companies of Sinopec and CNPC throughout China. Of course, we cannot predict the timing or extent of any sales.

We saw solid improvement in sales of forged products from wind power of customers this quarter with sales increasing 40% year-over-year to $3.7 million. We expect sales to stay near their current level for the balance of the year due to the many challenges that the industry is facing, including overcapacity, good connectability issues, and international trade protectionism. The longer term dynamics are much more favorable, especially as China moves towards this goal to reach 100 gigawatts of installed wind power capacity by 2015 and 200 gigawatts by 2020. The outlook for Chinese solar industry is more uncertain. In the first quarter of 2013, we did not generate any revenue from the sale of solar industry related products. In the near-term, the ongoing trade friction with Europe has closed many small and midsize manufacturers in China to continue to suspend production.

Last week, the European Commission agreed to punitive tariffs of 47% on solar panels imported from China, which will take effect in June. The Chinese government has requested an ongoing dialog in an effort to resolve these trade disputes. However, at this point, it seems very likely that Chinese solar manufacturers will be forced out of Europe formally one of the Chinese biggest solar export markets. However, the long-term outlook for the solar industry is more positive. As earlier this year, the Chinese government raised the installation target of 2015 to 35 gigawatts from the previous target of 21 gigawatts.

Now, let’s take a look at our financial performance. I would encourage you to refer to our Form 10-K filed with the SEC and our earnings press release issued yesterday. Our revenue for the first quarter of 2013 increased 47.6% to $13.9 million compared to $9.4 million for the same period of 2012. Our gross profit for the quarter rose 66.3% to $3.1 million compared to $1.9 million for the same period 2012. Gross margins improved to 22.5% during the first quarter of 2013 compared to 20% for the same period a year ago.

The increase in gross margin for the quarter was primarily due to two factors. First, we experienced increased operational and core deficiencies for forged rolled rings and related product segment, including the allocation of fixed cost primarily consistent with depreciation to cost of revenues as we operate at the higher production levels. Second, the significant portion of revenue from the dyeing and finishing equipment was generated from the sale of airflow dyeing machineries, which generates a higher gross margin than our traditional dyeing machinery.

Operating expenses decreased by 18.8% to $0.8 million compared to $1 million in the comparable period last year. The decrease was primarily due to lower depreciation expense resulting from the classification of certain equipment as held-for-sale in the fourth quarter of 2012, on which depreciation was taken in the first quarter of 2012, but not in the first quarter of 2013.

Selling, general, and administrative expenses for the three months ended March 31, 2013 rose 10.8% to $0.7 million, primarily due to higher travel, entertainment and shipping costs associated with the increase in sales and increase in stock-based compensation cost. As a result our operating income rose 171.4% to $2.3 million, other expenses was $75,000 when compared to $308,741 in the same period last year. The decrease was due to the decrease in warrant modification expense of approximately $235,000, which we incurred in the 2012 quarter. We did not incur a comparable expense in the 2013 quarter.

Adjusted EBITDA, a non-GAAP measure, which adds back to net income interest expense, income taxes, warrant modification expense, depreciation and amortization, was up 60.9% to $3.9 million, compared to $2.4 million in the same quarter last year. Net income was $1.6 million or $0.56 diluted earnings per share compared to $0.3 million or $0.12 diluted earnings per share in the first quarter of 2012.

Now let’s return to our balance sheet, as of March 31, 2013, we had cash and cash equivalents of $1.2 million compared to $1.4 million at December 31, 2012. Accounts receivable were $9.5 million and total current assets were $20.9 million. We had $3 million in short-term bank loans, up from $2.2 million at December 31, 2012. Stockholders’ equity was $80 million at March 31, 2013.

In the first quarter of 2013, we generated $1.7 million in cash flow from operations. The increase in short-term loans, combined with cash flow from operations, we used to purchase approximately $2.7 million of equipment to expand capacity of airflow dyeing machinery. In May 2013, we repaid short-term bank loans in the amount of $0.8 million and re-borrowed the same amount from Bank of Communications at an interest rate of 6.72%. For the remainder of 2013, we expect that most of our spending will be primarily oriented towards new product development including after-treatment equipment and oil and natural gas products.

We are off to a great start in 2013 led by stellar performance of our dyeing and finishing equipment segment. We have a fewer new contracts in the pipeline and we have purchased new equipment to expand capacity to meet this demand. While our near-term challenges remain in both the wind and solar markets, the long-term outlook is positive. In the meantime, we will continue to seek to diversify our revenue base and modify our product lines to respond to the needs of other heavy equipment industries and clean technology industries. We are optimistic about our prospects for 2013 and we will continue to utilize our expertise in manufacturing precision products to generate profitable growth.

We want to thank all of our investors for their continued support. With that, we would now like to call for question-and-answers from our audience.

Question-and-Answer Session

Operator

(Operator Instructions) At this time, there are no questions. I’ll now return the call to management for any final remarks.

Adam Wasserman

Okay, thank you, operator. On behalf of the entire 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 see – speaking to you again on our next earnings conference call.

Operator

Thank you for participating in the Cleantech Solutions' first quarter 2013 earnings conference call. You may now disconnect.

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