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Lentuo International, Inc. (NYSE:LAS)

Q3 2013 Earnings Call

December 9, 2013 8:00 AM ET

Executives

Christian Arnell - Christensen, IR

Jing Yang - CEO

Analysts

Peter Siris - Hua Mei 21st Century

Operator

Good morning ladies and gentlemen and thank you for standing-by. Welcome to the Lentuo International Inc.’s Third Quarter 2013Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) I would like to turn the conference over to Christian Arnell from Christensen. Please go ahead.

Christian Arnell

Hello and thank you for joining us for Lentuo International’s third quarter 2013 earnings call. I remind you that we are recording and webcasting today's call. The webcast archive of the call will also be available on the Investor Relations section of Lentuo’s website.

Joining me today are Mr. Jing Yang, Lentuo’s Chief Executive Officer and Ms. Jiangyu Luo, Lentuo’s Acting Chief Financial Officer. We will first cover the operational and financial highlights for the quarter and then go to your questions.

I remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors all of which are difficult to predict and many of which are beyond the Company’s control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties and factors is included in the Company's filing with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise except as required under law.

Next, Mr. Jing Yang, CEO will cover our strategy and I will translate for him. Mr. Yang, please.

Jing Yang

Good morning and good evening everyone. And thank you for joining us today. Our business continues to see the positive results of our strategy to focus on higher margin car models and the expansion of our after-sales services. I am pleased to see revenue and gross margins both increasing, particularly in automobile sales year-over-year. Net income increased to US$2.9 million for the quarter with revenue for higher margin after-sales services increasing as a percentage of total revenues.

The improvement we have made both operationally and financially during the quarter demonstrate the strength of the positive and long-term fundamentals of China’s auto industry and our ability to capitalize on them. As we push ahead, we expect to see our top and bottom-line continue to improve as the number of initiatives and partnerships we have created mature.

Our FAW-Volkswagen flagship store in Beijing immediately began contributing revenues following its official launch in mid-July 2013, selling 310 vehicles during the quarter. The flagship store has further reinforced our 16 year relationship with FAW-Volkswagen and exemplifies the kind of long-term relationships we intend to build with all of our partners. This year also marks 10 years since we began our relationship with Audi, whom we have also developed a strong partnership with and as we push forward on the number of new projects together, in particular the new Audi dealership under construction in South Beijing.

While we have only just begun cooperating with Itochu Corporation and First Automobile Finance in relative terms, we already feel like we have developed equally deep relationships with them following their vote of confidence in our strategy and ability to leverage their substantial financial and managerial resources.

I am pleased with the progress we have made thus far, but realize we still have a way to go. We will continue to further solidify our position as one of China’s premier dealership brands by leveraging the substantial base of knowledge and resources we have acquired over the years from our multiple partnerships and experience. I look forward to the opportunities that will emerge as we seek to continue to deliver sustainable growth over the long-term.

With that I will now turn the call back over to Christian, who will go over the financials.

Christian Arnell

Before reviewing the details of our financial results for the third quarter 2013, I would like to provide a brief overview of our revenues and cost recognition policy as per U.S. GAAP requirements. Our revenues comprise of new car sales, repair and maintenance services and other services, primarily insurance and financing commissions. We report revenues net of promotions and discounts and value-added taxes.

For cost of goods sold on new car sales, we report our costs of purchase from OEMs and in accordance with U.S. GAAP guidelines we recognized rebates on purchases from OEMs when conditions are fixed or can be reasonably estimated such as volume purchase rebates. For rebates that are based on subjective factors such as customer satisfaction results or based on the discretion of the automobile manufacturer, we recognize these rebates only when realized. Consequently, our cost of goods sold and therefore gross margin can significantly fluctuate quarter-over-quarter or year-over-year due to the varied recognition timing of OEM rebates.

Now let me discuss the third quarter 2013 results. Revenue for the quarter was $155.7 million, up 13.6% year-over-year. Revenues from automobile sales were up 11.5% year-over-year to $133.9 million. The Company sold 4,842 vehicles during the quarter, up 8.6% from the same period last year. Average new vehicle unit price for the third quarter of 2013 was $27,874, up 3.3% from the same period last year.

Revenue from repair and maintenance services increased by 22.1% during the quarter to $19.2 million. The Company serviced 49,979 vehicles during the quarter, down 11.6% from the same period last year. The increase in revenues from repair and maintenance services was primarily due to the optimization of the Company’s service offering mix within repair and maintenance services towards higher price products which tend to contribute more to profits, given the higher average selling prices.

The decrease in the number of vehicles serviced was primarily due to the abnormal effects of severe rainstorms Beijing experienced last summer in July 2012, which caused a temporary spike in the number of vehicles needing repair.

Cost of goods sold increased 8.2% to $139.5 million during the quarter as a result of higher revenue. Gross profit was $16.2 million, up 99.2% from the same period last year. The increase in gross profit was mainly due to the increase in overall gross margin. Overall gross margin was 10.4%, compared with 5.9% in the third quarter of 2012. Gross margin for automobile sales was 4.9% compared with 1.1% in the same period last year. Gross margin for repair and maintenance services was 41.1%, up from 40.8% during the third quarter of 2012.

The increase in gross margin for automobile sales was primarily due to the abnormally low gross margins seen in the second half of 2012 during the strain in Sino-Japanese relations. This directly affected sales of Japanese branded cars and also caused lower gross margins on non-Japanese branded cars due to increased competition.

Gross margin on Japanese and non-Japanese branded cars have since recovered substantially. Overall gross margin increased mainly due to the significant increase in gross margin for automobile sales, which contributed most of the Company’s revenues.

Selling, marketing and distribution expenses increased 60.6% to $5.7 million during the quarter, primarily due to additional staff and new dealerships and wage inflation. As a percentage of revenues selling, marketing and distribution expenses increased to 3.6% in the third quarter of 2013 from 2.6% in the third quarter of 2012. General and administrative expenses were $4.1 million, up 39.7% from the same period last year. The increase was primarily the result of additional staff for new dealerships. As a percentage of revenues general and administrative expenses increased to 2.7% in the third quarter of 2013 from 2.2% in the third quarter of 2012.

Operating income was 6.4 million during the quarter of 2013. Operating margin during the third quarter of 2013 was 4.1%, compared to 1.2% for the same quarter in 2012. The increase in operating margin was primarily attributable to the 450 basis point increase in overall gross margin and the 150 basis point increase in operating expenses as a percentage of revenue.

Net income attributable to the controlling interest was $2.9 million. This translates into basic and diluted earnings per ADS of US$0.08. As of September 30, 2013, the Company had cash and cash equivalents of $21.3 million.

This concludes our prepared remarks for today. Operator, we will now open the call up for questions. Please begin.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) We do have a question from Peter Siris from Hua Mei. Please go ahead.

Peter Siris - Hua Mei 21st Century

Peter Siris, Hua Mei. I have a couple of questions. The first question is I’ve seen that you’re building a Auto Mall in Heilongjiang. Can you just tell me what the timing on that is and what that’s going to end up being?

Jing Yang

Hello, this is [Maxine Jung] [ph] of Lentuo International and I will translate for CEO Jing Yang. And he just said, we already signed the paper with government and we are doing the planning and we’re supposed to have the approval from the government at the first quarter of 2014.

Peter Siris - Hua Mei 21st Century

And just so I understand that will be a complete - who will be in the hub, what will that mall consist of?

Jing Yang

Sorry, I can't hear you clearly, would you mind to repeat that question, sorry.

Peter Siris - Hua Mei 21st Century

What will that mall be? In other words who will be in there, how big will it be, what's the concept there?

Jing Yang

Basically we will [concentrate] right now, in a couple of things, one is a [full] [ph] store, the other one is repair and maintenance franchise store. Also we're looking at the pre-owned car centers and also we have the auto motel, auto car loan center. So all this, this is related to car business.

In terms of the process we are working with the government right now, this design has to be approved by the city government. Once it's approved and we will be going through the bidding process for the land once we are win the bidding and we can begin the construction, so that's the whole process.

Peter Siris - Hua Mei 21st Century

My next question is, I know there are automobile restrictions in Beijing and how are these automobile restrictions impacting your business?

Jing Yang

So you probably heard that the restriction policy has changed recently, the whole new [license plate] [ph] [inaudible] a year reduced to 120,000 a year, so we think this policy will not greatly impact our business because currently 60%-70% of our business comes from the trading business. So the increase of new license plates cannot impact our business greatly.

Secondly even if we have the 240,000 new license plates in existing, there were probably only about 170,000 or 180,000 new cars sold through this system, because even if people win a lottery they'll probably wait until the early next year to buy the car. So that's why out of the 240,000 new license plates there were only 170,000 or 180,000. So, it reduced from 180,000 to 120,000. We didn’t think [inaudible] that greatly.

Peter Siris - Hua Mei 21st Century

And one more question. So, as people trade up and buy better cars in Beijing, you’ve talked before about what to do with the used cars, selling the used cars outside of Beijing, are you doing anything to move used cars out of Beijing to other markets?

Jing Yang

Yes, Peter you are right. So, right now we are doing this kind of business, we have been relied on a lot of the online auction company, which helps to auction those used cars to users outside of Beijing for example [inaudible] which you may heard of. And also, we hire those shipping companies to ship those used cars to take it outside of Beijing. So, to answer your question, yes we are doing this business right now.

Peter Siris - Hua Mei 21st Century

But you are not going to be opening, are you going to be opening used car centers outside of Beijing where you would sell the car yourself?

Jing Yang

We are going to mainly focus on Tier 1 cities because those cities -- we are going to focus mainly on those cars we call core value used car meaning miles lower than 20,000-30,000 and the years lower than two or three years. So, these are the core value pre-owned cars with -- and also focused only on the high-end cars and those car sources comes mainly from the Tier 1 cities. And also for cities like Beijing, Shanghai, Hangzhou, the data support show that the used car and new car sales has reached a 1 to 1 ratio already. So, that’s why we will focus mainly on the Tier 1 cities for the pre-owned car center.

Operator

(Operator Instructions) There are no further questions at this time. I will now turn the conference over to Christian Arnell for closing remarks. Please go ahead.

Christian Arnell

Thank you. In closing, on behalf of the entire Lentuo management team, we’d like to thank you for your interest and participation in today’s call. If you required any further information or have any interest in visiting our dealerships in China, please let us know. Thank you for joining us today. This concludes our third quarter 2013 conference call. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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