Highpower International, Inc. (NASDAQ:HPJ)
Q2 2013 Earnings Conference Call
August 13, 2013 10:00 am ET
Tricia Ross – Investor Relations-Financial Profiles, Inc.
Henry Sun – Corporate Secretary and Chief Financial Officer
Good day, ladies and gentlemen and thank you for standing by. Welcome to the Highpower International Q2 2013 Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, August 13, 2013.
I’d now like to turn the conference over to Tricia Ross of Financial Profiles. Please go ahead.
Thank you and good morning. This is Tricia Ross, Investor Relations for Highpower International. By now you should have all received a copy of the press release we putout earlier this morning. If you still need one, please feel free to contact my office at 310-478-2700.
Before we begin, I would like to remind you that comments on today’s call contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are identified through the use of words expect, project, target, continue, believe, and other words of similar meaning. Such statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of Highpower International to differ materially from the results expressed or implied by such statements.
For a discussion of risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors and Management's Discussion and Analysis of financial condition and results of operations in the Company’s annual report on Form 10-K and other reports the Company filed under the Securities and Exchange Act of 1934.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable there can be no assurance that such expectations will prove to be correct. The Company has no obligation to update the forward-looking information discussed during today’s call. With us today on the call from management is Henry Sun, Chief Financial Officer.
With that, I would now like to turn the call over to Henry.
Thank you, Tricia, and thank you all for joining us today. Welcome to Highpower International’s second quarter 2013 earnings conference call. As always, I will begin with an overview of our second quarter financial results, which we reported in our press release issued before the market opened. Then, as we are now halfway through the fiscal year, I will provide some brief commentary on our initiatives and the business drivers. Finally, I will review our outlook for our fiscal year 2013 before opening up the call to your questions.
Let me start by stating we achieved a significant sales milestone in our lithium business this quarter, which delivered the strongest quarter for that business in our Company’s history. Lithium volume continues to help our overall business growth and represents the primary growth driver for Highpower going forward.
We are very pleased with the excellent results that we are seeing from this business line. Though our nickel-metal hydride battery sales, which is our other major business lines declined slightly during the second quarter. We are very much better than some of our competitors who are being impacted by competition and pricing pressures. All things considered, our Nickel-Metal Hydride battery segment remains an important and a sustainable business line for us with strong and valuable relationships.
Net sales for the second quarter of 2013 were $31.2 million, a year-over-year increase of 6.1% compared with $29.4 million for the second quarter of 2012. The increase in sales for the second quarter was driven by increased demand for our lithium batteries from new and existing customers. However, it was partially offset by a decrease in sales from our Nickel-Metal Hydride battery segment.
Lithium battery net sales were up 33% in the second quarter over the same period in 2012. Sales were also up 33% sequentially from the first quarter of 2013. Total pieces were up 29% year-over-year and our total lithium battery volume per ampere hour increased by 32% year-over-year and up over 53% year-to-date over the same period last year.
Nickel-Metal Hydride net sales were down approximately 9% in the second quarter of 2013 over the second quarter of 2012. Despite the intense competition in this business line, we have still been able to maintain our pricing.
Second quarter 2013 gross profit decreased to $5.7 million, as compared with $6.0 million for the second quarter of 2012. Gross profit margin was 18.4% for the second quarter of 2013, as compared with 20.5% for the second quarter of 2012. The year-over-year decrease in gross profit margin for the second quarter of 2013 was primarily attributable to increases in labor costs.
R&D spending was $1.4 million for the second quarter of 2013, as compared with $1.2 million for the comparable period in 2012, reflecting the expansion of our workforce to expand our research and development and management functions.
Selling and distribution expenses were $1.4 million for the second quarter of 2013, as compared with $1.3 million for the comparable period in 2012. The year-over-year increase in selling and distribution expenses was due to the expansion of our sales force and marketing activities, participation in industry trade shows, and international travel to promote and sell our products globally.
General and administrative expenses were $2.6 million for the second quarter of 2013, as compared with $2.3 million for the second quarter of 2012. The increase was mainly due to the expansion of our workforce in various functions to support our growth.
Net income attributable to the Company for the second quarter of 2013 was $109,289, or $0.01 per diluted share, based on 13.6 million weighted average shares outstanding. This compares with second quarter of 2012 net income of $503,714 or $0.04 per diluted share, based on 13.6 million weighted average shares outstanding.
Now turning to the balance sheet. At June 30, 2013, Highpower International had cash, cash equivalents and restricted cash totaling $27.3 million, total assets of $121.2 million, and stockholders' equity of $31.8 million.
Bank credit facilities totaled $69.0 million at June 30, 2013, of which $36.2 million was utilized and $32.8 million was available as unused credit. We believe that we have a very stable balance sheet that is sufficient to support our initiatives in 2013 including our expansion of our lithium battery production capacity. We continue to have excellent relationships with our bank lenders.
Our days sales outstanding stood at 73 days for the second quarter of 2013, which is an improvement from 88 days during the first quarter of 2013. Approximately, 63% of our revenue came from China, Hong Kong, and the rest of Asia in the second quarter of 2013. Europe contributed approximately 28% to this quarter, and the remaining 9% coming from North America, and the rest of the world.
Next, I will give you an update on some of our business drivers, and the initiatives. We believe that the lithium battery market represents an attractive growth opportunity for us, and therefore we are making investments today that impact our bottom line in the short-term, but that should enable us to capture an even greater market share in the future, and emerge as a long-term leader in the space.
Research and Market issued a report in July 2013 that the global lithium battery market should reach the $25 billion mark by 2017. Just last year, the global lithium market grew in excess of 30%, and we grow our lithium business at a much faster pace, thus gaining market share. 38% of the industry growth was attributed to consumer electronics, which is why we have raised more emphasis on this attractive market segment with our cleaner, higher capacity batteries.
In addition, we are positioning our planned increase in production capacity to meet the growing demand for batteries that sell into this high growth consumer electronics sector, and we are working on a robust pipeline of a new product in the space. We look forward to sharing more information with you as these new products come to fruition.
That said, we are very excited about our new automated facility in Huizhou, which will be coming online later this year. We should begin shipping some initial products from this facility as early as the fourth quarter. With the addition of this automated facility, we believe that we are well positioned to attract larger customers, and to capitalize on the growing global demand for rechargeable batteries.
We are working with potential Tier 1 customers on their new product certification, and we’re very excited about these opportunities. Without the addition of the new facility we would have been unable to pursue these projects as we are currently operating at full capacity in our existing facilities.
Our sales and marketing team continues to attend a variety of trade shows that further showcase our batteries to a larger international customer base. In August, we will be going to Brazil for the first time. South America is largely untapped market growth. But with their growing economies they should be a good source of future sales, especially for our cleaner, higher capacity batteries for mobile devices, smartphones, tablets and energy storage systems.
We continue to make progress on the ramp up of our new battery and e-waste recycling business. However, this will not be a contributor until 2014 as we are still in the build-out phase of the business.
Finally, I will turn to our guidance. As I mentioned earlier, we continue to make upfront investments that are required to prepare us for accelerated growth in our lithium battery business. Our investments in manufacturing, research and development, sales, and marketing have all increased in anticipation of this growth and have impacted our current profitability.
However, we remain focused on continued profitability in the second half of 2013. Therefore, I’d like to reaffirm our outlook for fiscal year 2013. Based on our current expectations for global demand for the rechargeable battery product in 2013, and our continued shift toward mobile power sources, higher-value energy storage systems and transportation products, we expect revenues to grow between 15% and 20% over the 2012 revenue levels. We expect to remain profitable for the full year in 2013.
Also I want to mention, I will be attending some investor meetings in the fall and would welcome in our facility to meet with you, if you are in New York or on the West Coast. Please reach out to Ross to schedule a meeting.
So I’d now like to open the call to your questions. Operator, please go ahead.
Thank you, sir. (Operator Instructions) Our first question is from the line of (inaudible), a private investor. Please go ahead.
First of all, congratulations on a fantastic quarter, excellent job. Just have a couple of questions for you. If you are successful in getting most of the new business wins that you are working on, do you expect them to begin shipping in Q4 or mostly in 2014?
Mostly it will be in 2014, but starting from Q3 to Q4, we have been shipping sample products for testing and examination, so these sales come to more, I would say, a more mature sales in 2014.
All right, excellent. Just one another follow-up question; at what run rate capacity utilization, do you expect to be at in the new facility by the end of 2013?
I am sorry, could you repeat your question.
I am sorry. What run rate capacity utilization do you expect to be at in the new facility by the end of 2013?
Yes, our 2014 run rate, we like to see 80% of the run rate capacity usage.
Okay. And then how much do you expect to spend in CapEx for 2013 and roughly how much is for equipment at the new facility?
At the new facility, we are planning for more or less around $10 million for the rest of the year, and they are basically towards new product equipment and R&D equipment.
Excellent, thank you very much.
Thank you. And our next question is from the line of [Jing Gong Qing], another Private Investor. Please go ahead.
Hi. Thank you for taking my question. So basically I have two questions related to your lithium business. So the question is, can you talk about more on the industry outlook and also I would like to know your forecast on your lithium business? Thank you.
Thank you for your question. The industry growth for lithium battery, as I mentioned during my speech, it was around 30% this year, but you can see our lithium battery growth is 53% year-to-date, year-over-year. So we are seeing power den industry average growth rate. But for the second half of the year we could see slower growth because of the capacity issue, but 2014, we’ll then see a big return.
Thank you. (Operator Instructions) I’m showing no further questions. I’ll turn the conference back to Henry Sun for closing remarks.
Okay. Once again on behalf of the entire Highpower team, I want to thank you again for joining us on today’s call. Please feel free to contact Tricia Ross at Financial Profiles at 916-939-7285 or myself if you have any follow-up questions. As always we welcome your feedback. Thank you.
Ladies and gentlemen, this concludes our conference for today. If you’d like to listen to a replay of today’s call, it will be available for one week. You can dial 303-590-3030 or 1800-406-7325 with the access code of 4635068. We thank you for your participation. You may now disconnect.
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