Jinpan International's Management Discusses Q4 2013 Results - Earnings Call Transcript

Mar.10.14 | About: Jinpan International (JST)

Jinpan International Limited (NASDAQ:JST)

Q4 2013 Earnings Conference Call

March 10, 2014 4:30 PM ET

Executives

Albert Sheng – Vice President-Investor Relations

Mark Du – Principal Financial Officer

Analysts

Douglas S. Ruth – Lenox Financial Services, Inc.

Iain Macdougall – National Bank Financial

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Jinpan International Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Instructions will be provided at that time for you to queue up for questions. As a reminder, this conference is being recorded.

With us today is Mark Du, Jinpan’s Chief Financial Officer and Albert Sheng, Jinpan’s Vice President of Investor Relations. This call may contain forward-looking statements made pursuant to the Safe Harbor Provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations involve known and unknown risks, uncertainties and other factors not under the Company’s control, which may cause actual results, performance or achievements of the Company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors detailed in the Company’s filings with the SEC. Jinpan undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call.

At this point, I would like to introduce Mr. Albert Sheng. Albert, please go ahead.

Albert Sheng

Thank you, operator and thank you everyone for joining today’s conference call. I will provide a brief introduction, review of fourth quarter and full year 2013 performance, and then an update on current business development. Afterwards, I will turn the call over to Mark Du, who will more thoroughly review our financial results and provide our outlook for 2014.

I would like to begin with a quick company overview. Jinpan International was founded in 1993 and completed our IPO in 1998. We have paid a dividend since 2005 and last month our Board of Directors approved $0.01 increase in our weighted quarterly dividend to $0.04 per share. The first quarterly dividend of 2014 will be paid later this month.

We are a leading manufacturer of dry type cast resin transformers in China. We also manufacture VPI transformers and reactors, switchgears, and unit substations. Our products are used for electric control and power distribution in demanding industrial applications and mission critical infrastructure into airports, rail transportation, wind energy, utility scale, solar installations and commercial and industrial facilities.

More than 75% of our sales are from cast resin transformers, which are used to change the voltage of electric current. With the recent startup of our fourth manufacturing facility in China, we are now the largest producer of cast resin transformers in China by capacity. More than 80% of our sales are within China, with demand driven by electricity consumption and infrastructure investment, which are associated with China’s overall industrialization and urbanization, as well as China’s build out renewable energy.

Our international sales are driven primarily through supply relationships with global industrial electrical equipment manufacturers. We are qualified suppliers with six major global electrical electric equipment suppliers manufacturers.

I would now like to review our fourth quarter and full year 2013 results and since we’re nearly complete with our first quarter, I will provide additional commentary about our current performance and business outlook. We’re pleased with our accomplishments during 2013, which translate into strong operating results and a return to growth and margin expansion for the year. Our team’s exceptional execution on the ramp-up of production at our Guilin facility enabled us to achieve record annual sales and has put us on a path for sustainable revenue and earnings growth.

Jinpan net sales for the fourth quarter was $63.1 million, an 18.2% increase from the same period last year. Net income increased 6.2% to $4.1 million, or $0.24 per diluted share. Jinpan’s annual revenue in 2013 reached $225.7 million, a 7.2% increase over the prior year and a historical record for the Company.

Demand recovered as the year progressed, and sales going into second half of the year increased 17.5% over the same period in the prior year as domestic sales growth accelerated and international sales were boosted by the resumption of the shipments to our largest OEM customers. Our full year operating margins resulted expansion over the prior year, despite incurring the cost of ramp up at the new facility. We remained focused on driving sustainable revenue earnings growth through disciplined execution of our growth strategy.

I will now provide an update on each of our key focus areas; increase in production, advancing our position within the domestic market, expanding our international OEM business and enhancing our product leadership.

First, the startup and ramp up of production at four manufacturing facility, which is also located in China was well executed. We have called our team members who are able to deliver these results.

This 6 million KVA cast resin transformer production capacity at the new plant brings our total capacity to 17 million KVA and establishes us as China’s largest manufacturer of cast resin transformer by capacity.

Importantly, we were able to bring the facility online at scale production to enable us to achieve record annual revenue during 2013. We’ve exceeded our annual target producing 2.7 million KVA from that facility from initial start last March towards end 2013.

The Guilin facility give Jinpan to increase scale and efficient cost structure necessarily to advance our already strong position within domestic market and put us on a path of continued growth and margin by expansion.

Second, our core domestic market is showing resilience and we are pleased that the momentum that we saw during the second half 2013 have continued in 2014, with steady demand during January and February. While China’s infrastructure investment has become more measured we’re lined with areas to help investment and have seen a strong growth within subway project and utility scale solar installation.

Third, our international business is showing strong progress as we recently completed qualification with two additional global industrial electrical equipment manufacturers for bringing our total number to fixed OEM customers. Although most of our export revenue in 2013 was derived from sales to our largest OEM customer was seeing a gradual pickup of quotation activity from some of our newer OEM customers. We are optimistic that our international business will show steady growth and diversification of the next several quarters.

Fourth, we continue to invest in research and development to support new product initiatives, new market development and customer qualification. We have several projects in process and focused on product development to address new customer requirements at the end of new market as well as process on improvement to reduced production cost.

In summary, our operating results for 2013 reflect a remarkable effort and capabilities of our team and their focus on a disciplined execution of our strategy.

Looking ahead 2014 and beyond, we believe we have the scale, cost structure, product leadership, customer relationship and talent to deliver sustainable revenue and earnings growth.

At this point, I would like to turn the call over to our Chief Financial Officer, Mark Du, who will present the details of our financial performance and discuss our financial outlook for 2014. Mark?

Mark Du

Thank you, Albert. I will now discuss our fourth quarter and full year 2013 consolidated results and outlook for the full year of 2014.

Net sales for the fourth quarter were $63.1 million, an 18.2% increase from $53.4 million in the same period of last year. The increase was driven by the best growth in the Chinese market and a strong recovery in International sales.

In the fourth quarter, China sales increased $18.7 million year-over-year to $57.5 million. Net sales outside of China for the quarter increased 14.3% year-over-year to $5.6 million. The sale of cast resin and VPI transformers excluding those for wind power applications, switchgears and unit substations increased 17% year-over-year to $58.5 million, while wind energy products, which include cast resin transformers and VPI reactors for wind power applications increased 35% to $4.6 million.

Gross profit in the fourth quarter increased 27.2% year-over-year to $20.7 million. Fourth quarter 2013 gross profit margin was 32.9%, compared to 30.5% in the prior year period. Gross margin in the fourth quarter increased compared to the same period last year due to a stabilized pricing environment and a favorable raw material costs.

Selling and administrative expenses in the fourth quarter were $18.5 million, or 29.3% of net sales, compared to $14 million, or 26.2% of net sales in the same period last year. Selling and administrative expenses increased for the same period last year due to the higher sales volume and increased research and development expenses, which were abnormally low in the prior year.

Operating income for the fourth quarter decreased 4.8% to $2.2 million. Operating margin was 3.5%, compared to 4.4% in the same period last year. Net income for the fourth quarter increased 6.2% to $4.1 million. Net margin was 6.4% compared to 7.2% in the same period last year.

Earnings per share were $0.24 compared to $0.23 in the same period last year. For the full year 2013, net sales were $225.7 million, a 7.2% increase. Gross profit in 2013 increased 5.3% to $72.4 million and a gross profit margin decreased to 32.1%, compared to 32.7% during 2012.

Selling and administrative expenses were $55.7 million, compared to $53.9 million last year. Operating profit in 2013, increased 12.1% to $16.7 million, operating margin was 7.4%, compared to 7.1% during 2012.

Net income in 2013 increased 17.8% to $16.6 million, or $0.99 per share, compared to $14.1 million, or $0.84 per share, in the prior year.

As of December 31, 2013, the Company had $30.8 million in cash and cash equivalents, restricted cash, and a short term investments, compared to $30.5 million as of December 31, 2012. The Company’s accounts receivable on December 31, 2013 totaled $144.6 million, compared to $124.6 million as of December 31, 2012.

We have implemented procedures and are improving our accounts receivable and we primarily resulted to dilute our accounts receivable and we expected our days sales outstanding will decrease over the coming quarters.

Total bank loans outstanding at December 31, 2013 were $43.1 million, compared to $43.9 million at December 31, 2012. At the end of December, our backlog equaled $100 million, down 27.5% from prior year period and down 4.8% from the third quarter 2013.

The increased production of standardized cast resin transformers from our Guilin facility has accelerated our average cycle time and enabled us to convert orders into revenue more quickly. This is reflected by our record level of inventory turnover for 2013. We are comfortable with our backlog and expect it to gradually increase from these levels as our business expands.

For the full year 2014, the Company projects revenue and earnings growth of approximately 10% to 15% compared to 2013. Net sales are expected to be in the range of $248 million to $260 million and the net income is expected to be in the range of $18.2 million to $19.1 million, or $1.09 to $1.14 per share.

That concludes our remarks for today’s conference call. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll now take our first question from Doug Ruth with Lenox Financial Services.

Douglas S. Ruth – Lenox Financial Services, Inc.

Congratulations to everybody at Jinpan for a very nice report. Could you give us some detailed color on the two additional OEMs and when exactly they qualified?

Albert Sheng

Sure, Doug. As you know and as many others callers know, Jinpan yearly has no publicity [ph] causes in our agreement with these customers. So there’s very limited information, I think, shared with you regarding their identity. But these two OEM customers are customers that we have qualified with over the last several months. So, again we qualified, I think, someone in Q4 of 2013 late in the year. And also, I think one either Q1 or – Q1 again this year. Yes, we have qualified. So these are customers for multiple customized, non-win product transformers and we are beginning to see quotations from them for our products.

Douglas S. Ruth – Lenox Financial Services, Inc.

Are they U.S.-based customers?

Albert Sheng

These are multinationals and some of them are based. For that I would say the multinational companies and they are based. I’m sure they are based in the U.S. and also in China and Europe. Yes.

Douglas S. Ruth – Lenox Financial Services, Inc.

Okay. So have we received any kind of orders from them so far?

Mark Du

Yes, we did. We did receive some order from them.

Albert Sheng

And also request for quotation.

Douglas S. Ruth – Lenox Financial Services, Inc.

Okay. So possibly we’re to receive, maybe see some orders in the first half of 2014 do you think?

Albert Sheng

That’s our expectation, yes, for these two new OEM customers.

Douglas S. Ruth – Lenox Financial Services, Inc.

Okay. Well, that sounds really good. What is the utilization rate now of the Guilin facility?

Albert Sheng

The Guilin facility, total capacity we are able to manufacture is 6 million KVA and in 2013 total capacity is 2.7 million KVA. In 2013, we only operated about nine months. So we expected in the normal run we should be able to manufacture about 4 million KVA in Guilin facility.

Douglas S. Ruth – Lenox Financial Services, Inc.

Would you expect to make 4 million KVA in 2014 in Guilin?

Albert Sheng

Yes, that’s our goal. We expected to manufacture 4 million in 2014.

Douglas S. Ruth – Lenox Financial Services, Inc.

The factory will be fully utilized based on that utilization rate?

Albert Sheng

No.

Mark Du

No.

Albert Sheng

The factory has a capacity currently estimate 6 million KVA of cast resin transformers. So last year, 2013, we produced 2.7 million KVA. And in this year, 2014, our target, our goal is to produce somewhere around 4 million KVA. That’s our target this time, yes.

Douglas S. Ruth – Lenox Financial Services, Inc.

Two-thirds utilization, is that correct?

Albert Sheng

Yes.

Douglas S. Ruth – Lenox Financial Services, Inc.

Okay. What was the R&D budget in the fourth quarter of 2013 versus the fourth quarter of 2012?

Mark Du

Fourth quarter 2013, we incurred about $4.3 million R&D.

Douglas S. Ruth – Lenox Financial Services, Inc.

Very good expense.

Mark Du

Yes. So it just happened in Q4. We incurred a lot of R&D and for 2012 about $1.5 million R&D, 2012 Q4.

Douglas S. Ruth – Lenox Financial Services, Inc.

Well, how about the dollars? We went from $4.3 million in – there’s $4.3 million, right, or is that…?

Mark Du

$4.3 million, yes.

Douglas S. Ruth – Lenox Financial Services, Inc.

Yes. And how many dollars in fourth quarter of 2012?

Mark Du

$1.5 million, I’d say R&D.

Douglas S. Ruth – Lenox Financial Services, Inc.

U.S. dollar?

Albert Sheng

Yes, it’s all U.S. dollar. It’s all U.S. dollar.

Douglas S. Ruth – Lenox Financial Services, Inc.

And why did we spend the additional $2.8 million at?

Mark Du

They are new products. It’s under development and still too early to disclose at this moment.

Douglas S. Ruth – Lenox Financial Services, Inc.

I like when you spend money in R&D because you’ve shown that you are very good storage of the shareholders’ money and have made really good decisions when you spend money on the research and development. Could you give us some more detail about the accounts receivable? What else can you tell us about it?

Mark Du

We understand the importance of collecting accounts receivable, and we also understand that in our industry there are certain types of customers, especially government related entities, take much longer time for them to pay us.

For example, our railroad industry, and there are some other industry take a longer time for them to pay us. So we understand the importance of collections. So we just put in some measurements and put in more resources total account receivable plus the management understand if we can collect receivable faster, this way improve our cash flow, and that enable us to add sufficient cash to pay down our loan. So management understand the importance of receivable status. And we also want to make sure we did approve the sufficient better reserve for our receivable.

Douglas S. Ruth – Lenox Financial Services, Inc.

Okay. And how long does it take – on average how long does it take the railroad to pay you?

Mark Du

Railroad sometimes take more than a year to two years to pay to finish their final payment.

Douglas S. Ruth – Lenox Financial Services, Inc.

And on the receivables how much of it is represented by the railroads?

Mark Du

Railroad, on the last two years, railroad industry become one of our significant sectors for our growth. So it’s more than 10%, but less than 15%.

Douglas S. Ruth – Lenox Financial Services, Inc.

That’s very helpful. I’m grateful for the increase and the dividend that is very good, and could you offer a little bit of commentary on the stock price? The stock is still trading at a pretty good discount towards book value.

Albert Sheng

Doug, we don’t have any more commentary on stock price. I mean, we’re obviously glad to see some more definition in the market of Jinpan. Jinpan has been listed in the U.S. for a long time and since 2005 we’ve consistently paid a dividend. So I think we will let the Company’s performance speak for itself. And we will continue to work hard to communicate more with investors and hopefully to continue gain more recognition on the market.

Douglas S. Ruth – Lenox Financial Services, Inc.

Okay. Well, thank you for answering my questions, and congratulations on a very nice report.

Albert Sheng

Thank you.

Mark Du

Thank you, Doug.

Operator

(Operator Instructions) We’ll take our next question from Iain Macdougall with National Bank Financial. Go ahead, please.

Iain Macdougall – National Bank Financial

Hi, Mark and Albert, just wanted to ask a quick follow-up question here and one other. On that railroad length of time to pay, can you comment and give a sense of how that relates to bad debt, or how concerned are you that even though they are taking up to 12 months to pay, is there any issue with that payment or you pretty comfortable that you are going to get paid that you’re dragging you?

Albert Sheng

On railroad because government own project. So we are pretty comfortable they would pay, they kept – they also as percentage of the payment then we started until finish the project, that’s why they prolong the payment for our receivable. And we are pretty comfortable about the payment.

Iain Macdougall – National Bank Financial

Is that a pretty standard way to operate in China to have this long drawn out contract for payments or is it something specific to what you guys are doing with the railroad?

Albert Sheng

Particularly for railroad that a longer time to pay than the other industry. So typically it’s a little bit paying six months, 180 days.

Iain Macdougall – National Bank Financial

Okay, can you give a bit of your sense of the economy over in China where you see it now compared to say 12 months ago, is there certain risk that you are seeing there, that you guys are trying to stick handle around or are you pretty comfortable with helping you’re turning out now with the new government and so forth.

Mark Du

We can let speak in general terms on that, we think it will, yes, it’s moderating in China and our company strategy, we – that overall growth to be slower in 2014 than compared to the last two years. For us, we are always looking for the best market for our product, so our job at the company is to look at new potential markets, new potential products that will support our ongoing growth.

Iain Macdougall – National Bank Financial

Can you give a general comments on what’s you’re seeing in terms of the new government’s position, because I had a conversation with you Mark about two years ago and just before the government came in and everybody was kind of awaiting to see how they reacted towards industry. Can you give a comment on how you see the government’s relation with industry there?

Mark Du

I think, the new government are more cautious compared with prior governments, instead putting big money on infrastructure that doing more strategically and more cautiously and within, if I just go for not a economy for a long run for the long-term.

So we are not going to see the shutdown in the past growth, we can see steady growth but in long term, that’s how we can see additional growth, so they invest the money in important sector that improve China’s long-term economy environment. So that’s how we see China.

Iain Macdougall – National Bank Financial

Okay, fantastic guys, thank you very much.

Albert Sheng

Thank you.

Operator

(Operator Instructions) Ladies and gentleman, at this time, I would like to turn the floor back to management for any closing remarks.

Albert Sheng

Thank you, everyone for your time this afternoon and your questions. We are encouraged by recent offering and financial performance and we remained focus on executing our growth strategy. We look forward to updating you on our progress during our next conference call in May for our first quarter 2014 results.

As a reminder, Mark Du and I will be presenting at the 26th Annual Roth Conference tomorrow, March 11, at 2.30 p.m. Pacific Time, which is 5.30 p.m. Eastern Time and we look forward to seeing some of you there. Thank you again and have a good day.

Operator: Thank you. Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation. You may now disconnect your lines at this time.

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Jinpan International Limited (JST): Q4 EPS of $0.24 Revenue of $63.14M