A-Power Energy Generation Systems, Ltd. Q4 2009 Earnings Call Transcript

| About: A-Power Energy (APWR)

A-Power Energy Generation Systems, Ltd. (NASDAQ:APWR)

Q4 2009 Earnings Call

March 31, 2010 8:00 am ET


[Kevin Theis]

Jinxiang Lu - Chairman and CEO

John Lin - COO and Director

Peter Mak – CFO


Brian Yerger - Aerca Advisors

Private Investor

Cory Garcia – Raymond James


(Operator Instructions) Welcome to Q4 2009 A-Power Energy Generation Systems, Ltd. Earnings Conference Call. I would now like to turn the presentation over to your host for today, Mr. [Kevin Theis].

[Kevin Theis]

Before we start, I would like to remind you that managements prepared remarks contain forward looking statements that are subject to risks and uncertainties, and management may make additional forward looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks as but not limited to inclement weather conditions, construction, manufacturing and development delays on our projects, outside factors that can influence the development of our wind turbine business, our limited operating history and our entrance into new markets and the wind turbine business, various MOU’s we signed with third parties, which may not evolve into definitive contracts, potential difficulties working with our joint venture partners, potential difficulties completing the acquisition of our intended targets, a decreasing the rate of growth of China's industry and economy and other information detailed from time to time in the company's filings and future filings with the United States Securities and Exchange Commission.

Accordingly, 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. In addition, any projections as to the company's future performance represents managements estimates as of today and we undertake no obligation to correct or update any forward looking statements provided as a result of new information, future events or even changes in our expectations.

Joining us today are Mr. Jinxiang Lu, Chairman and CEO, Mr. John Lin, COO and a Director and Mr. Peter Mak, our CFO. Because we will be translating all questions and answers, we ask for your patience at that time. Mr. Lu the Chairman will now deliver his opening remarks.

Jinxiang Lu

[English Translation]

We are very pleased with our fourth quarter results and continue to deliver annual growth featuring both our distribution power generation, turnkey contact services, and emerging wind turbine production. As China has demonstrated its economic resilience throughout the global financial crisis and renewed its growth momentum driven by their infrastructure build out and the rapid urbanization. Power generation continues to stay in the limelight.

Last year, China consumed 3.6 trillion kilowatt hours, increasing by 5% from the previous year. Officials with the National Energy Bureau predicted that the figure may rise to 4 trillion with the likely growth late of 9% year on year; China’s electricity consumption in the first two months of the year 2010 grew 26% year on year to 626.4 billion kilowatts hours.

According to the National Energy Administration the electricity consumption volume in February was 272.1 billion kilowatt hours, up 11% from the previous year. Consumption in the primary industry sector toped 12.5 billion kilowatt hours last month, up 13% year on year, circa the rate industry consumption rose 30% to 455.4 billion kilowatt hours and to residential power use rose 13%.

The Chinese government is working on a 10 year initiative that should see 15% of the country’s electricity generated from low carbon sources by the year 2020, particularly on the wind energy front. In the year 2009 China installed 67 million kilowatts of power generation capacity, maintaining the status as the world’s second biggest power producer. In the coming year, the country aims to increase another 70 million kilowatts of capacity and at such pace China will overtake the United States to become the top power producer in several years.

In September 2009 the company signed the definite contract to acquire 100% of EVATECH Coal Limited of Kyoto, Japan, a 22 year old designer and manufacturer of industrial equipment for LCDs, PDPs, and more recently amorphous-silicon, photovoltaic panels.

In December 2009, FPG established a Delaware limited project company with United States Renewable Energy Group partners, LLC. The project company we are to own design, develop, construct, manage, and operate a wind energy power plant to be located in Texas with a total name plate capacity of 600 MW. The company has been designated to supply turbines to the project.

While Chinese domestic customers remain interested in large wind turbines with proven records, our involvement in the Texas wind farm development paved the way for our foray into the much larger US wind energy market. With an exciting to 2010 ahead of us.

With that, let me turn the call over to our CFO, Mr. Peter Mak, to report our quarterly financial results. After the prepared financial review I will come back to take your questions.

Peter Mak

Before we start I would like to state that all our number presented in US dollars and are unaudited. Revenues in the year 2009 fourth quarter increased to $125.9 million from $81.4 million in the fourth quarter of year 2008. The increase was primarily due to the increased DG revenue and a partial revenue recognition of the 10 wind turbines sold in the fourth quarter.

Gross profit increased 84.9% to $26.9 million from $14.5 million in the same period of year 2008. Gross margin was 21.3% up from 17.8% in the same period of year 2008. The improvement in gross margin was mainly attributable to sales of the 2.7 megawatt wind turbines which carried higher gross margin.

Selling, general and administrative expenses amounted to $4 million an increase of $0.3 million from $3.7 million in the previous year. As a percentage of revenue these expenses decreased from 4.9% in the fourth quarter of year 2008 to 3.2% for the fourth quarter of year 2009. The decline was mainly attributable to the higher revenues driven by the wind turbine sales.

Operating income was $22.8 million compared with $10.8 million in the same period year 2008 reflecting 111.4% year over year increase. Excluding the expenses and non-cash losses relating to the convertible bonds and warrants, non-GAAP net income was $21.6 million compared with $10 million in the fourth quarter year 2008. Non-GAAP diluted earnings per share was $0.61 compared with $0.30 in the fourth quarter of year 2008. GAAP net loss for the fourth quarter was $23.9 million compared with a net income of $10 million in the same period of year 2008. Diluted loss per share were $0.69 compared with diluted earnings per share of $0.30 in the same period of 2008.

As of December 31, 2009, the company had cash and cash equivalents and restricted cash totaling $179.8 million compared with $47.1 million at the end of year 2008. Total shareholder equity rose to $252.6 million at December 31, 2009, from $155.3 million at December 31, 2008.

For the fiscal year 2009 net revenue increased year over year by 17.5% to $311.3 million. Gross profit increased 38.5% to $51.1 million from $36.9 million in year 2008. Gross margin was 16.4% compared with 13.9% in the same period of year 2008. The increase in gross margin was mainly attributable to the sale of 2.7 megawatt wind turbines which carry higher gross margins.

Selling, general and administrative expenses were $12.8 million compared with $8.7 million in year 2008. The increase was mainly due to all the activities related to the EVATECH acquisition, the Texas wind farm project, and other locations and actions.

Operating income in year 2009 rose 35.7% to $38.2 million from $29 million in year 2008. The increased income was generated by higher gross profit, partially offset by the higher operating expenses. Excluding the expenses and non-cash losses related to the convertible bond and warrants non-GAAP net income was $36.1 million or $1.05 per share, compared with $28.5 million and $0.94 earnings per share in year 2008. GAAP net loss for the year was $16.7 million compared with net income of $20.5 million in year 2008.

At this point I would like to turn the call over to our COO, John Lin, to share with you our most recent developments and our business outlook.

John Lin

In January 2010 A-Power signed a technology license agreement with the German wind turbine design company W2E Technologies to manufacturer, operate, service, and selling T8x 2.05 megawatts wind turbines. Under the license of W2E Technologies require a power exclusive right to manufacturer, operate, service, and selling T8x models 2.0 megawatts wind turbines in China and the United States, starting January 2010.

In addition, A-Power has a non-exclusive rights to market T8x model products outside China and the United States. In March, 2010, EVATECH signed a definitive contract with the Chinese leading renewable energy company, to supply wind sets of the PV solar machines. The contracts cover design, manufacturing, and also installation of the PV solar machine. The total amount of the contract is $1.7 million. A down payment has been received with the shipment expected by May 31, 2010.

Finally, I would like to take the opportunity to provide our 2010 annual top line guidance of $380 million and bottom line balance of $45 million. Those targets are based on our company current DG contracts which are subjected to change when the company signed a new DG contract and are recognized the revenue from the wind turbine sales during the year. We expect that it will be from time to time, periods update when we additional major DG contract and wind turbine sales and confirming.

With that, let me join Mr. Lu, and Peter Mak to take your questions. Again, we will require you to be patient when we have the translation of the questions and answers. Operator, please begin the Q&A.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Brian Yerger - Aerca Advisors

Brian Yerger - Aerca Advisors

I was wondering if you had a production schedule or delivery schedule for wind turbines for 2010 and 2011.

Jinxiang Lu

[English Translation]

With regards to the production and the delivery for the year 2010 and 2011, currently I can only tell you it is in the process of forming, means that we are still in considering to finalize the final schedule because we are doing the source of the components and other like marketing analysis. We cannot give a very exact information about this. But in the next quarter press release we give you very specific and exact information to your question.

But, I can give you such information in consideration of the Texas project because this project needed to be completed within two years time, the ton of capacity is for 600 MW. Also in view of some domestic projects in China, which also there should be certain amounts of project needed to be completed within this year so based on the situations for our sourcing the components we will give a coordination on the exact schedule on the projection and delivery and so next press conference for the next quarter release I will give you more exact information and will give you satisfactory answers to your question.

Brian Yerger - Aerca Advisors

A clarification for the 2010 guidance, does that include any wind turbine sales for this year or does not include?

John Lin

Yes, including.


Your next question comes from a Private Investor

Private Investor

What is Mr. Lu’s vision for wind and solar business for the next five years?

Jinxiang Lu

[English Translation]

With regards to the wind turbine sector, just as I mentioned, within the next five year plan for the Chinese government it will promote the development of the reduced carbon or low carbon energy. The government has priority from this development of the wind turbine. Also another fact is that the Chinese government is in the process of building the state grade in large quantity, that means very large demand for the wind turbine.

Also, in viewing the US market we are still trying to get in more contacts not only in the state of Texas but also in other parts of the US. Also, in consideration of other markets all over the world we foresee a very bright future for our wind turbine markets all over the world.

From our own sight because we can provide very complete sizes of the wind turbines including like 225, 750 KW, 1.0 MW, 2.0 MW, 2.5 MW, and also we are doing R&D on some wind turbines can be used both on the sea and also on the land. Since that we have the belief, we believe that there is a very bright future for the wind turbine sector from A-Power.

With regards to the solar energy cell sector, currently the acquired company by A-Power, EVATECH is focusing on the production of the PV production light equipment manufacturing. Its products like it is called kind is called amorphous-silicon, this is different from the traditional silicon PV products with very low cost in production. Also we have signed the contract with [Inaudible] Group which is the number one in the world for the producing of the glass wall for the buildings. By this contract we will supply our PV to that group to be applied into its glass walls for the buildings.

Also, like the PV equipment, the feature for EVATECH is that PV compared with the Japanese EVATECH company there is only single layers but our product is kind of like the blocks and can be replaced by each part with each other and so it’s very flexible, can be applied. This kind of features can make EVATECH company which was acquired by A-Power a very sharp edge compared with its competitors.

Also in its R&D currently it is focusing on the flexible cell. This kind of flexible cell we have hired a very good team of specialists which are very advanced experts in this field. Seems this kind of flexible cell would be produced very soon. Also in the 2013 the National Game of China will be held in Liaoning City. The municipal government they will support us to promote our new product in the solar cell energy sector on this national game and to get better publicity. Since that, for this regard a power also foresee a bright future.

Also both the municipal government and learning provincial government they have promised to grant subsidies for the acquisition of EVATECH by A-Power currently it is in the process of coming to place. Another good news for EVATECH is that currently it is in negotiation with contracts with the company BYD of China and for cooperation and both its sales and production EVATECH thinks that we’ll have a very good market in the future with its good features on the low cost and its kind amorphous-silicon technology and to market later technology.


Your next question comes from Private Investor.

Private Investor

The EPS growth for 2010 and the margin outlook for 2010?

Peter Mak

Let me try to answer that answer in a conservative way. What happened is in this year and year 2009 as we have already described, our earnings per share on a diluted basis is about $1.05. We, as a company, have set a target that we will try to maintain these earnings on a per share basis even though we all understand that we have increased our share capital by quite a bit.

In the early this part of the year in January year 2010 we complete an acquisition of $33 million and an addition of 5.7 million new shares. Today our number of shares increased to 45.7 million and we expect that they will be addition waves in the coming future. We will try to manage the earnings per share with the increased number of shares. We expect that, as John mentioned, our bottom line guidance will be $145 million.

Again this is an estimate based on a very conservative basis and that given that today we are having 45 million shares today so the earnings per share if you can all calculate without using a calculator is again $1.00 it is something that we are always keeping in mind. If we need to have additional new shares, probably we will have to work very hard in order to generate additional revenue and additional income in order to maintain these earnings per share target.


Your next question comes from Cory Garcia – Raymond James

Cory Garcia – Raymond James

I’m wondering if you guys would give a breakdown for 2010 top line guidance between your DG business and your revenue recognition from your wind turbine business and also what sort of margin progression you guys are baking in throughout 2010 with obviously the ramp up of wind sales throughout the year.

Peter Mak

Internally obviously we have our own budget and we have segment budgets. We have targets for each business segment in terms of revenue, costs and also margins and the bottom line. We believe that they will be easier for us to manage the overall performance of the company by only giving the top line and the bottom line guidance as the company as a whole. That means one number for the top line and the other number for the bottom line. We don’t expect and we do not prepare to release information by segment on the guidance. Sorry about that.

With regards the gross margin, as you find out from the release and later on you probably from our [inaudible] you can figure out that the margin from the wind turbine sales is much higher than our regular DG business, it is for sure. We expect the same will happen in year 2010 and going forward.


There are no more questions at this time. I’d like to turn the call back to [Kevin Theis] for closing remarks.

[Kevin Theis]

Thank you everyone for joining us on A-Power’s fourth quarter 2009 earnings conference call. We look forward to updating you on our first quarter 2010 results. Feel free to get in touch with us anytime that you have further questions, concerns, or comments. Thank you everyone and have a great day.

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