Executives
Tricia Ross – IR, Financial Profiles, Inc.
Henry Ngan – CFO
Analysts
Amit Dayal – Rodman & Renshaw
Hong Kong Highpower Technology, Inc. (HPJ) Q4 2009 Earnings Call Transcript March 30, 2010 11:00 AM ET
Operator
Good morning. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hong Kong Highpower Technology fourth quarter and year-end 2009 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. Tricia Ross of Financial Profiles, you may begin your conference.
Tricia Ross
Thank you and good morning. This is Tricia Ross, Investor Relations for Hong Kong Highpower Technology. Before we begin, I would like to remind you that comments on today’s call contains forward-looking statements within the meaning for 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 Hong Kong Highpower Technology 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 Conditions and Results and 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 be proved to be correct. The company has no obligation to update the forward-looking information discussed during today’s call.
With that, I would now like to turn over the call to Henry Ngan, Chief Financial Officer of Hong Kong Highpower Technology.
Henry Ngan
Thank you Tricia and thank you all for joining us today. Welcome to Hong Kong Highpower Technology’s 2009 fourth quarter and year-end earnings conference call. With me today is our Chairman and Chief Executive Officer, Mr. George Pan; and our Corporate Controller, Mr. Sam Qui.
I will begin my remarks today by making some general comments on our business and reviewing our full-year and fourth quarter 2009 results, which we reported in our press release issued this morning. Overall, 2009 was an extremely successful year for Hong Kong Highpower Technology, especially considering the global macro environment in which we have been operating over the past 18 months.
In fiscal year 2009, we were able to exceed our internal operating and financial targets, and we would like to thank all of our employees for helping the company achieve its goals. We more than doubled our net income in 2009. In addition, we significantly increased our gross profit and margins despite negative economic headwinds. Most importantly in 2009, we achieved record profitability and highest level of unit volumes sold in the company’s history.
As a company, we strongly focused on cost containment efforts over the past year. Successful execution and these cost savings initiatives including detailed budget planning and forecast with each department and careful production costs proved invaluable in helping us weather the most severe economic crisis in recent history, while at the same time achieving record profitability. As we look forward to fiscal year 2010, we believe we are well positioned within our industry to capitalize on growth opportunities.
We estimate that we currently have well over 10% share of global nickel-metal hydride battery market. Moreover, we have excellent and stable customer relationships with many good chip names. We anticipate demand for our products will continue to increase in 2010 over last year's levels as the remaining effects of the recession appear to be fading away.
Overall, we remain cautiously optimistic for 2010. We believe Hong Kong Highpower Technology is an excellent position to continue with these positive business trends in the coming year. Though we know that as the global economy continues to improve and consumer demand begins to return, the inflation environment might serve as potential headwinds for our business and the world economy.
Now, on to a more detailed review of our financial results. Net sales for the year ended December 31st, 2009 totaled $70.3 million, a year-over-year decrease of 6% compared with $75 million for 2008. The year-over-year decrease was due to lower average selling prices, but was partially offset by an increase in unit volumes sold.
Gross profit for 2009 increased 18% to $15 million, compared with $12.8 million for 2008. Gross margin was 21% for 2009, compared with 17% for 2008. The year-over-year improvement in gross margin is attributable to implemented manufacturing efficiencies and a decrease in the average per unit cost of goods sold. Selling and distribution costs were $2.4 million for 2009, which was unchanged from 2008. General and administrative expenses, including stock-based compensation, were $6.4 million or 9.1% of net sales in 2009, compared to $6.1 million or 8.1% of net sales for 2008.
The slight year-over-year increase as a percentage of net sales was due to costs associated with continuing obligations as a public company and stock-based compensation expenses. We reported a loss on the exchange rate difference between the US Dollar and the Renminbi of $60,300 for 2009 compared with $1.2 million for 2008.
Provision for income taxes was $1.1 million for 2009 compared with $529,000 for 2008. Net income increased 122% to $4.4 million, or $0.33 per diluted share for 2009, based on 13.6 million weighted average shares outstanding. This compares with 2008 net income of $2 million, or $0.15 per diluted share for 2008, based on 13.2 million weighted average shares outstanding.
I will also briefly summarize our results for the fourth quarter December 31st, 2009. Net sales increased 27% year-over-year to $22.5 million and gross profit increased 37% year-over-year to $4.3 million. Gross margin increased to 19% for the fourth quarter 2009, compared with 18% for the fourth quarter 2008. Net income for the fourth quarter was $638,000 or $0.05 per diluted share, based on 13.6 million weighted average shares outstanding. This compares with fourth quarter 2008 net income of $303,000, or $0.02 per diluted share, based on 13.7 million weighted average shares outstanding, which resulted in an increase in diluted EPS of 150% year-over-year.
On to the balance sheet, on December 31st, Hong Kong Highpower Technology had cash and cash equivalents and restricted cash totaling $8.4 million, total assets of $51.1 million, working capital of $7 million and stockholders' equity of $21.2 million. Bank credit facilities totaled $27 million, of which $12.2 million was available as unused credit.
Now, let me touch upon some other relevant data points. Our days sales outstanding currently stand at roughly 60 days for 2009. Accounts receivable increased by 70% for 2009 as compared with 2008. However, we have not experienced any other changes in typical payment terms for contract lead time, we had to cut back any customer relationships due to credit issues outstanding. We decreased inventory levels by 5% in 2009 over 2008 to cope with the risks from the fluctuating price of nickel.
Our capital expenditure for 2009 was approximately $2.7 million, which we anticipate will be high in 2010 as a result of the continued build-out of our Hong Kong Highpower Industrial. With that as a summary of our financial and operational results, I will now comment on the overall business environment and provide an update on our key initiatives.
As I previously noted, we believe we are in an excellent position to continue on the growth trajectory in 2010. We think that as the effects from the recession continued to fade away that unit volume growth would likely to continue. Our customer base remains relatively stable. Energizer, VARTA, Siemens Gigaset continue to be our largest customers.
We saw overall customer orders increase in the fourth quarter and thus expect this trend will largely continue. We have recently received some key designation awards and honors in our industry that we are very proud that, that also helps cement our position as a key player in the worldwide rechargeable battery market. Again, we were awarded the honor of Excellent Exporter Enterprise from 2005 to 2009 from the China Industrial Association of Power Sources. The China Industrial Association of Power Sources is the biggest professional battery association in China. In 2009, they also ranked Hong Kong Highpower as the second largest net exporter of nickel-metal hydride batteries in China according to report they issued.
We were also recently awarded an International Product Mark Certificate for our nickel-metal hydride batteries. We believe the designation proves that our nickel-metal hydride batteries are worthy international first class level recognition and it helps us in our push to be a strong internationally recognized rechargeable battery player and increase our market share. We are pleased that we will now be able to adopt the marketing in our nickel-metal hydride products and packaging and this will further help increase consumer confidence in our products.
The company’s new lithium-ion battery products division, a major strategic initiative we launched in 2008 continues to progress well. And average monthly production in excess of 800,000 pieces in the fourth quarter, which is over a 100% increase over the same period in 2008. Construction of our nickel-metal hydride manufacturing facility in Huizhou, Guangdong Province continues to progress.
We began construction of our new manufacturing facility in 2008 and anticipate that the new facility will be completed in the fourth quarter of 2011. Once the facility is complete, we will move our nickel-metal hydride manufacturing operations to the new locations and as we have previously noted, we expect an increase in capacity and lower production costs after the transition into our new location.
To summarize, 2009 was a very successful year for Hong Kong Highpower, and we think that we are well positioned for even more success in 2010. We focus on creating shareholder value as we steady growth and cost control measures. We would now like to open the call to your questions. Operator, please go ahead.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of Amit Dayal from Rodman & Renshaw. Your line is open.
Amit Dayal – Rodman & Renshaw
Thank you. Can you hear me?
Henry Ngan
Yes, I can. Hi Amit.
Amit Dayal – Rodman & Renshaw
Hi Henry, hello George. Just, first of all, if you can please provide an update on the lithium ion business, you know, how the production is ramping up over the expected margins in this business, or are they coming in line with what your expectations of this and in terms of what the revenue contributions from this segment can be in 2010, just in general thoughts?
Henry Ngan
Sure. Let me just give you a very quick highlight and some updates on that business. In 2009, we see sequential improvement from a quarter-to-quarter basis. For example, second quarter was better than the first quarter. Third quarter was better than second quarter, fourth quarter was better than the third quarter. So, as a result, we are seeing an increase in improvement on a quarterly basis. As I mentioned to you before, our production now at average about 800,000 pieces per day. I think in a prior conference call, you asked a similar question, now the run rate on a revenue mix on a very high level basis is about 10% of the overall company’s revenue. It’s still not mature enough, so that we will not talk about the specifics in the business, but other than our comments, focusing on, the business is progressing well.
Amit Dayal – Rodman & Renshaw
The margins in this business, Henry, are they coming in line with what you have been expecting, are they slightly higher than the nickel-metal hydride business?
Henry Ngan
No, I think the margins, I think overtime will be healthier overtime, because as we thought in this business, it took us a little bit of time in terms of getting the production right and in terms of getting the technology right. Lithium-ion for the most part now in the market, there is always the safety issue, because that really surrounds the technology, but I think as we continue to improve on our production and in our technology, I think this will be a very healthy growing business for us and profitable business for us.
Amit Dayal – Rodman & Renshaw
In terms of production, just to clarify, of the 800,000 units we produced in the fourth quarter, roughly 10% of that is lithium-ion.
Henry Ngan
Let me clarify. I think the average monthly production is 800,000 pieces per day. So, we didn’t produce 800,000 pieces for the quarter. We produced 800,000 pieces on an average basis, on a monthly average basis.
Amit Dayal – Rodman & Renshaw
Monthly average basis?
Henry Ngan
That’s correct. So, you would just take a very rough cut, you know, take 800,000 and multiply by 3. So, it’s 2.4 million.
Amit Dayal – Rodman & Renshaw
Your margin expectations for 2010, you know, just from a modeling perspective, should we keep it in line with what we see in 2009?
Henry Ngan
Well, we don’t comment specifically on that business, like I say, I don’t think it’s materially enough to break it out, but I think as the business continues to grow in which we expect, I think we will provide a little more clarity, but I think in the longer term, we expect this business will be even more profitable than on nickel-metal hydride business.
Amit Dayal – Rodman & Renshaw
I apologize, I was referring to the overall business, you know, the margins for the overall business. Should we expect them to be coming in line with what we see in 2009?
Henry Ngan
I think it will be probably north of that.
Amit Dayal – Rodman & Renshaw
Better?
Henry Ngan
It will be better than 2009.
Amit Dayal – Rodman & Renshaw
Okay, perfect. And this issue on the stock-based compensation, does this usually play out in a bigger way in the fourth quarter, and should we expect it to kind of trend in a similar manner in 2010 as well?
Henry Ngan
Yes, so let me give you a little bit clarity on that. G&A, it’s obviously, it’s certainly higher than we would like, but once again, I think if you look at the first quarter and the second quarter now, I think the economy sort of stabilized a little bit, but you know, people tend to have a short memory in the sense that it was challenging for the world economy for the first half of the year. Now, I think it’s somewhat challenging but certainly better. Now, as we had a spectacular third quarter, I think we started thinking in terms of providing incentives, the bonuses to our employees. So, I think after the third quarter that we would tell bonus for our employees. So, (inaudible) because it was challenging, we didn’t know that you know, how we are going to do, but as the year progressed, we knew very clear that we will pay our bonus. So, the bonus was actually accrued in the fourth quarter. That’s why you saw somewhat of a material increase as compared to last year.
Amit Dayal – Rodman & Renshaw
Perfect.
Henry Ngan
So, the bottom line is, it was in a smooth flow on a quarterly basis, but once again, you know as we finished the third quarter, we knew that, you know, we have to reward our employees, so that’s why, you know, a little bit higher on a G&A basis. You know, some of it, you know, a good part of it, it’s on a bonus, that we pay out to employees.
Amit Dayal – Rodman & Renshaw
All right.
Henry Ngan
We reward them for a great job that they did for the company.
Amit Dayal – Rodman & Renshaw
And then in regards to your comments, Henry, on you know inflation and potential other headwinds, could you just point out one or two key issues that we should be monitoring in regards to HPJ’s business?
Henry Ngan
Yes, so it’s just really very high level general comment. In any typical economic cycle, as the economy continues to improve, to the – we comfortably see commodity prices go up. Now, one of the major cost component for us is nickel. And obviously, we have seen nickel quite hit, in terms of the prices hit bottom, probably in the first quarter of 2009, but as the year progressed, you know, we saw the raw material costs increase. I suspect as the economy continues to improve, the price of nickel continue to go up and that might serve some potential headwinds for our business amongst other expenses that might go up, because of better environment on just on inflationary basis. But once again, I think we are taking cautionary steps to manage our business. I think if you look at our margins in 2009, I think it really shows that, you know, George and the team really managed that business well.
Amit Dayal – Rodman & Renshaw
Perfect. Just one more question and then I will get back in queue, and this is again in reference to the margins for the overall business, you said, there should be some improvements in 2010 over 2009, could you give us a range of, you know, what’s that level of improvement could be?
Henry Ngan
You know, I think it’s very tough to gauge at this point, because there is really a lot of moving parts, you know, just to give you a perspective, what happens here. We think that orders will increase, pricing it’s difficult to state at this point. There is an effect playing out, you know, with maybe little inflation here and there. I think if we continue to manage our business well, I think we certainly in terms of range, it might be difficult to gauge at this point.
Amit Dayal – Rodman & Renshaw
Perfect. Just a last question, sorry.
Henry Ngan
No sorry, any questions that you can feel to ask.
Amit Dayal – Rodman & Renshaw
Just in relation to you know the growth drivers for 2010, should we track HPJ’s growth in line with, you know, GDP growth, faster than GDP growth, can you give us just some sense of, you know, organically how the growth in 2010 is going to be achieved, you know, what levels of growth should we be expecting for at least what management is internally, you know targeting for?
Henry Ngan
Yes, so I think, you know, tracking the economy, well, you know, we get our business in excess of 50% of our sales derived internationally. Little less than 50% is between Hong Kong and China. So, our business is actually influenced by all parts of the world. With that said, you know, as the economy continuously improves, you know, obviously tracking GDP around the world with help, but I think that given our management skills, I think that we can certainly do better than the GDP growth.
Amit Dayal – Rodman & Renshaw
Thank you. That’s all I have.
Henry Ngan
Okay. Great, thanks Amit.
Operator
(Operator instructions) There are no further questions at this time.
Henry Ngan
Operator, would you like to just wait for maybe another 10 to 15 seconds in case there is any last-minute questions?
Operator
(Operator instructions) There are no further questions at this time.
Henry Ngan
Okay, great. We at Hong Kong Highpower Technology would love to hear any feedbacks that you might have. Feel free to email us at ir@highpowerbatteries.net for any questions, comments and/or suggestions. Once again, the email address, it’s ir@highpowerbatteries.net. My contact information is also available at the end of the press release issued this morning. Also current information, we have more business development to be released sometime in the near future, so I ask many of you to be patient with us and stay tuned. Once again, on behalf of the entire Highpower team, I want to thank you again for joining us on today’s call. If you have any further questions, please do not hesitate to contact either our Investor Relations representatives at Financial Profiles in Los Angeles or myself. Thank you and have a great day.
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