Highpower Technology's Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Highpower International, (HPJ)

Highpower Technology (NASDAQ:HPJ)

Q3 2013 Results Earnings Call

November 13, 2013, 10:00 AM ET

Executives

Tricia Ross – Investor Relations-Financial Profiles, Inc.

Henry Sun – Corporate Secretary and Chief Financial Officer

Bryan Bai – Vice President of Worldwide Sales

Analysts

Operator

Good morning, ladies and gentlemen and thank you for standing by and welcome to the Highpower International Third Quarter 2013 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder, this call is being recorded today, November 13, 2013.

Right now, I’d like to turn the call over to Tricia Ross. Please go ahead.

Tricia Ross

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 put out earlier this morning. If you need one, please feel free to contact my office at 310-478-2700.

Before we begin, I would like to remind you, comments on today’s call contain 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 actual results of Highpower International to differ materially from those 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 files 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 are Henry Sun, Chief Financial Officer and Bryan Bai, Highpower's Vice President of Worldwide Sales.

With that, I would now like to turn the call over to Henry Sun, Henry go ahead.

Henry Sun

Thank you, Tricia, and thank you all for joining us today. Welcome to Highpower International’s third quarter 2013 earnings conference call. I am very happy, we have Bryan with me today to give some commentary on our sales and marketing efforts, but first I will provide a recap of our third quarter financial results, which we just reported in our press release issued before the market opened. After Bryan provides some brief remarks, I will review our outlook for the remainder of the fiscal year 2013, before opening up the call for your questions.

Overall the third quarter was an excellent quarter for Highpower. We were very pleased with the record revenue levels we achieved for both of our major battery business lines; Lithium and Nickel-Metal Hydride.

As we have seen for a number of quarters, our Lithium battery business continues to deliver dramatic growth. We continue to [secure] significant orders from new and existing customers. Our Lithium battery net sales were up 31.8% in the third quarter of 2013 over the third quarter of 2012 and our total Lithium battery pieces sold increased 22.5%; while we also had a 39% increase in volume per ampere hour.

In our Nickel-Metal Hydride business, we were able to gain market shares in Europe and pick up additional customers. As I have said it before, while the Nickel-Metal Hydride battery business operates in maturing industry, which lower expected growth rates, it's still an important business for us.

Total net sales for the third quarter of 2013 were $38.9 million, a year-over-year increase of 21.9% compared with $31.9 million for the third quarter of 2012. The increase in sales for the third quarter was due to a $3.6 million increase in the net sales of our lithium batteries and a $3.4 million increase in the net sales of our Nickel-Metal Hydride batteries.

The increase in the number of Nickel-Metal Hydride battery units sold in the third quarter of 2013 was primarily attributable to increased orders from our new customers. The increase in the volume of lithium batteries sold in the third quarter of 2013 was primarily attributable to growth in overall global demand.

Approximately 68% of our revenue came from China, Hong Kong and the rest of Asia in the third quarter of 2013. Europe contributed approximately 24% this quarter and the remaining 8% coming from North America and the rest of the world.

Third quarter 2013 gross profit decreased to $7.2 million, as compared with $7.6 million for the third quarter of 2012. Gross profit margin was 18.6% for the third quarter of 2013, as compared with 23.9% for the third quarter of 2012. The year-over-year decrease in gross profit margin for the third quarter of 2013 was primarily attributable to decreases in the average selling prices. We haven’t experienced competitive pricing pressure in the Nickel-Metal Hydride battery business as the industry moves towards product consolidation.

However the gross margins for our Lithium business remain at the high end of their historical range as we have benefitted from operating at nearly full capacity and have seen a modest shift towards higher margin products.

R&D spending was $1.5 million for the third quarter of 2013, as compared with $1.1 million for the third quarter of 2012, reflecting the expansion of our R&D and management functions.

Selling and distribution expenses were $1.6 million for the third quarter of 2013, as compared with $1.4 million for the third quarter of 2012. The year-over-year increase in selling and distribution expenses was due to the expansion of our sales force and the increase of marketing activities, including participation in industry trade shows, and international travel to promote and sell our products globally.

General and administrative expenses were $3.0 million for the third quarter of 2013, as compared with $4.0 million for the third quarter of 2012. The decrease was mainly due to lower bad debt expense for the September 2013 quarter.

Net income attributable to Highpower for the third quarter of 2013 was $742 or $0.05 per diluted share, based on 13.7 million weighted average shares outstanding. This compares with third quarter 2012 net income of $644 or $0.05 per diluted share, based on 13.6 million weighted average shares outstanding.

Now turning to the balance sheet. At September 30, 2013, Highpower International had cash, cash equivalents and restricted cash totaling $37.1 million, total assets of $143.2 million and stockholders' equity of $33 million. Bank credit facilities totaled $83.7 million at September 30, 2013, of which $47.1 million was utilized and $36.6 million was available as unused credit. We continue to have excellent relationships with our bank lenders.

Our days sales outstanding stood at 68 days for the third quarter of 2013, which is an improvement from 73 days during the second quarter of 2013. We are managing our inventory levels diligently even as we are experiencing our robust topline growth.

Inventories were $17.2 million at September 30, 2013, up modestly from our $16.7 million on December 31, 2012 and $17 million from the year ago level.

Now I’ll turn the call over to Bryan, so he can provide some updates on our new facility as well as some of our recent sales and marketing efforts, before I recap our outlook for the year and open the call to your questions.

Bryan Bai

Yes, thanks Henry. I am pleased to be on the call today to provide our shareholders with update on our sales and marketing efforts. Firstly, let me talk about our new facility in Huizhou. We see tremendous growth opportunities in lithium and therefore are very excited along with our customers about being able to conveniently meet the growing demand of our products and this new and emerging facility.

The factory work is focused on producing different batteries, the smartphones, tablets and added storage and electrical vehicles. All markets that are presently very strong demand and that are expected to continue to deliver high growth for the foreseeable future.

Over time, our new facility -- our new facility will allow us to triple our existing different production capacity and service some of the different [personnel] that we are currently targeted on as the result of our existing capacity constraint.

Our presence has been very selective with our customer orders only just in the best business and are turning away approximately 40% of our incoming request. We are starting [this more fast] production in the new facility and it had the same material volumes in the first quarter of 2014.

I will also briefly just turn to our Nickel Hydride Metal business while we are unlikely to seeing much growth in the Nickel Hydride Metal battery sector. With this thing, we can be a strong consolidation leader and leave a respectable margin due to our industry reputation, product quality and global consumer base to customer base. We have picked up customers in Europe during the quarter and are very [aware] despite the competitive price environment that continues to exist in the market.

Also of interest you may have seen that we delivered advanced electrical vehicle [herein]. This battery system to [having mileage] during the month of October, this was [a template] electric battery system that was installed in the electric race car designed by Harbin Institute of Technology and was used for electrical car racing and Formula SAE China. We tell this was an ideal for them, because it allowed us to display our capability to design and manufacture effective car system, car battery system or electric high-speed racing cars.

Our power battery system can achieve active energy balance in the end. At the real time the [Board] management system to check battery systems working [feathers]. We plan to continue to explore this market going forward and we will provide update as appropriate.

Highpower continues its leadership in the global battery market. We recently host the 2013 Annual Conference for the Hydrogen Storage Material Branch of the Association of China Rare Earth Industry. The Conference was held in Huizhou last week and had more than 60 global industry representatives in attendance, quite focused on development of China's battery industry for clean energy.

Discussions took place on key technologies to utilize rare earth and hydrogen storage materials for advanced battery applications such as energy storage systems and electrical vehicles as well as how to best integrate industry resources. Following the conference, we had attendees visit our industrial park in Huizhou.

We continue to make progress on the ramp up of our new battery and e-waste recycling business. Please note that this wouldn’t be much a contributor until 2014, as we are still in the build-out phase.

Now, I will turn the call back to Henry. Henry?

Henry Sun

Thank you, Bryan. People, I open the call to your questions. I wanted to provide an update on our guidance. Based on our current expectations for global demand from the rechargeable battery market in 2013, and our continued shift toward mobile power sources, higher value energy storage systems and the transportation products, we are reaffirming our full-year 2013 revenue guidance to be 15% to 20% higher than our 2012 revenue levels.

We also reaffirm our expectations that we will be profitable for the full-year in 2013. Despite making upfront investments in the business; we remain focused on cost control measures and the further use of capital.

We will now like to open the call to your questions. Operator, please go ahead.

Question-and-Answer session

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) And our first question does come from the line of [Rob Peterman]. Excuse me, [Mr. Peterman]; your line is open for any questions at this time.

(Operator Instructions) And at this time, I'm not showing any questions in the queue. I would like to turn the call back over to management for any closing comments.

Henry Sun

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 and good night.

Bryan Bai

Thank you.

Operator

Thank you. Ladies and gentlemen, that will conclude the conference call for today. If you would like to listen to a replay of this conference, you may do so by dialing either 303-590-3030 or 1800-406-7325. You will need to enter the access code of 4650086. Those telephone numbers once again are 303-590-3030 or 1800-406-7325 with the access code of 4650086. Again, we do thank you for your participation on today's call. You may now disconnect your lines at this time.

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