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Cleantech Solutions International, Inc. (NASDAQ:CLNT)

Q2 2013 Earnings Conference Call

August 15, 2013 09:00 ET

Executives

Elaine Ketchmere - Compass Investor Relations

Adam Wasserman - Chief Financial Officer

Ryan Hua - Vice President, Operations

Operator

Good morning, and welcome to the Cleantech Solutions International Inc. Second Quarter 2013 Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Elaine Ketchmere with Compass Investor Relations. Please go ahead.

Elaine Ketchmere - Compass Investor Relations

Thank you, operator. Good morning, ladies and gentlemen, and good evening to those of you joining from China. I would like to welcome all of you to Cleantech Solutions’ earnings conference call for the second 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 Maple Jong from Compass Investor Relations to 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 the 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 quarter ended June 30, 2013.

In addition, any projections as to the company’s future performance represent management’s estimates as of today August 15, 2013. Cleantech Solutions International Inc. assumes no obligation to update these projections in the future as market conditions change.

At this point, I would like to state that on this call we will 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 - Chief Financial Officer

Okay, thank you Elaine. Good morning everybody and thank you for joining us on our call today. We appreciate your continued support and interest in Cleantech Solutions.

During the second quarter, we continued our growth with year-over-year increases in revenue and net income of 34.1% and a 160.8% respectively. Our dyeing machine segment was the main driver behind our performance growing 95% year-over-year as textile manufacturers continued to phase out obsolete equipment and reduce pollution from the dyeing process in keeping with the policies of local PRC governments.

We also saw a healthy increase in sales of forged products to customers outside the wind power industry. We are recently granted five new patents from the State Intellectual Property Office of the PRC for devices and parts of our airflow dyeing machine, providing us with exclusive use of these designs in China for 10 years. The patents related to devices and parts that allow for lower water and energy usage, improved dyeing effects, extend the service life of the machine and provide easier cleaning and atomized dyeing equipment. We are encouraged by recent economic data indicating Chinese economy is showing signs of stabilizing, although we anticipate credit conditions will remain tight. Our dyeing machine segment will continue to play a significant role in the second half of the year, but at a more tampered growth rate than we have seen over the last few quarters.

In June, we received a $2 million purchase order for 21 airflow dyeing machines from a new customer in China, which is expected to be shipped in September. We are also making good progress on our new after treatment machine. As detecting the prototype of our compacting machine earlier this year, our customer had placed an order, which is currently in production. We anticipate follow on orders from this customer in the future. Our new compacting machine is used in the final finishing of knitting material, such as cotton and it is designed to improve the softness, reduce shrinkage, and ensure better dimensional stability. We expect several compacting sales from Chinese textile manufacturers before year end as we believe that our equipment performance similar to German and U.S. import at a more attractive price.

In 2013, we purchased $5.8 million of new equipment to expand capacity of our dyeing machine operation, which has been operating close to full utilization this year. The new equipment is capable of producing our full line of dyeing equipment, traditional dyeing machines, airflow dyeing machines, and our new after-treatment compacting machines. We are currently installing equipment and on track to begin production by the end of the year. We saw a healthy increase in sales of forged products to non-wind customers. We expect to build upon this growth in the future as we pursue new end markets with favorable prospects of growth. One area we see potential is China’s oil and natural gas industry. We believe that is a large market for our forged plants and pipes, which are components used in oil and natural gas onshore and offshore drilling and refinery equipment. Although we cannot predict the timing or extent of any sales, we are encouraged by our recent discussions with several subsidiary companies of China National Petroleum Corporation.

Now, I’d like to comment on two important clean energy end markets, wind and solar. Sales of forged products from our wind power of customers this quarter declined 33.4% year-over-year to $3.1 million. In the near-term, we expect sales to wind power customers to contribute less to our revenue mix due to the many challenges the industry is facing including overcapacity, grid connectivity, and parallel containment issues. The longer term dynamics are much more favorable, especially to the extent that China moves forward towards this goal to reach 100 gigawatts of installed wind power capacity by 2015 and 200 gigawatts by 2020. In terms of solar, we generated $0.8 million in revenue from sales of solar equipment-related products in the second quarter of 2013.

While recent resolution of the trade dispute between China and Europe is an encouraging sign, we do not expect any significant impact of our business in the near-term. As with the wind power, the longer term outlook is more favorable as the Chinese government has set installation target for 2015 of 35 gigawatts. Going forward, we will continue to utilize our assets along with our expertise in manufacturing precision products to meet the needs of other heavy equipment in clean technology industries as we seek profitable growth.

Now, let’s take a look at our financial performance. I will encourage you to refer to our Form 10-Q filed with the SEC and our earnings press release issued yesterday. Our revenue for the second quarter of 2013 increased 34.1% to $17.2 million compared to $12.8 million for the same period in 2012. Our gross profit for the quarter rose 47.5% to $4 million compared $2.7 million for the same period in 2012. Gross margin improved to 23.1% during the second quarter of 2013 compared to 21% for the same period a year ago.

The increase in gross margins for the 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 cost primarily consisting of 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 segment was generated from the sale of airflow dyeing machineries, which generates a higher gross margin than our traditional dyeing machinery.

Operating expenses decreased 23.2% to $0.9 million compared to $1.1 million in the comparable period last year. The decrease was primarily due to recovery of bad debt and 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 second quarter of 2012, but not in the second quarter of 2013.

Selling, general and administrative expenses for the three months ended June 30, 2013 declined 17.5% to $0.6 million, primarily due to a $300,000 recovery of bad debt offset by higher travel, entertainment, and shipping costs associated with the increase in sales, as well as research and development expenses related to our new after-treatment equipments. As a result, our income rose 98.1% to $3.1 million.

Adjusted EBITDA, a non-GAAP measure, which adds back to net income, interest expense, income tax, warrant modification expense, depreciation and amortization, was up 2.2% to $4.8 million, compared to $3.1 million in the same quarter last year. Net income was $2.3 million, or $0.79 diluted earnings per share compared to $1.1 million or $0.40 diluted earnings per share in the second quarter of 2012.

Now, let’s turn to our balance sheet. As of June 30, 2013, we had cash and cash equivalents of $3.3 million compared to $1.4 million at December 31, 2012. Accounts receivable were $10 million and total current assets were $22.7 million. We had $3.1 million in short-term bank loans, up from $2.2 million at December 31, 2012. Stockholders’ equity was $85.4 million at June 30, 2013.

In the first half of 2013, we generated $5.2 million in cash flow from operations and used $5.8 million in cash flow from investing activity to purchase equipment to expand capacity of airflow dyeing machine for the remainder of 2013, we expect that most of our spending will be primarily to our new development including after treatment equipment in oil and natural gas products. In June and July, we have received net proceeds of $2.4 million from the sale of 578,916 shares of our common stock to investors. We do not anticipate raising equity in the balance of 2013. In July and August 2013, we repaid back acceptance notes payable in the amount of $1 million.

In conclusion, as we entered the second half of the year, we are confident about our future, although we have some concerns regarding credit conditions in China. We expect sales of airflow dyeing machines and anticipated sales of new products, including our after-treatment compact machine to be main drivers of revenue growth. We have purchased new equipment that will increase dyeing machine capacity by year end and are hopeful that we will secure customers for our new forged products and after-treatment textile equipment soon.

While near-term challenges remain in both the wind and solar markets, the long-term outlook is positive. In the meantime, we will continue to see to diversify our revenue base and modify our product lines to respond to the needs of other heavy equipment industries and clean technology industries. Based on current anticipated orders for the full year ended December 31, 2013, we affirm our guidance for revenue in the range of $60 million to $62 million and net income in the range of $8 million to $8.5 million. We thank you all of our investors for your continued support.

With that, we would like to open up the call to questions and answers from the audience.

Question-and-Answer Session

Operator

Yes. We will now begin the question-and-answer session. (Operator Instructions) And we have no questions today. I would like to turn the conference back over to management for closing remarks.

Adam Wasserman - Chief Financial Officer

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 speaking to you on our next earnings conference call.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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